After a mixed week, a strong close on Friday resulted in the Dow Jones industrial index finishing back above 20000. US markets were encouraged by another decent employment report, and Donald Trump fulfilling on his promise by signing a directive to review the Dodd-Frank legislation as well as the fiduciary rule that requires brokers to act in their client’s best interests. In contrast this new-found optimism in equity markets is not necessarily finding its way into the US bond market. Economic optimism is expected to show itself in the bond market by a widening gap between shorter term interest rates, and longer term ones. This time last year, when sentiment towards the US economy was not what it is today, the gap between the two and ten year US treasury yields was 120 basis points, pretty much where it is today. The gap between two and thirty year yields is fractionally closer. This lack of widening or steeping of the yield curve, as it is better known, could be a sign that bond markets are not quite as optimistic of Mr Trump as equity investors. The US dollar which had been strong into the year end, barely reacted on Friday.
For followers of the Vix as a gauge of sentiment in the equity market, consider it a measure of investor fear and greed, will note with interest the index fell below ten last week briefly. The last time the index fell below ten was almost exactly a decade ago to the day.
The FTSE 100 had a better week, rising around 0.5% over the week, helped by the pound giving some ground up against the US dollar. Gold had a good week rising $28 over the week, trading back over $1200 an ounce. Commodity stocks, oil aside, did not have a good day on Friday as the Bank of China raised short term interest rates, which may impact economic growth in the region and therefore demand for raw materials.
We pointed out at the end of last week that there appear to be strains developing within Europe, as yields on Italian bonds creep higher. On Monday Mario Draghi will present the ECB's perspective on economic and monetary developments to the Economic and Monetary Affairs Committee. The discussion with MEPs should also cover the ECB's quantitative easing programme amid rising inflation. The widening gap between yields on Spanish and Italian bonds may also get an airing.
It is a quieter week for economic data for the world’s largest economy, on Tuesday December’s balance of trade report may grab some headlines. Also on Tuesday the result February’s IBD/TIPP economic optimism survey is released. Last month’s survey reported the highest level of optimism since November 2006. The point optimism reached its lowest level, March 2009!
Brexit will continue to dominate UK headlines after last week’s vote to trigger article 50. MP’s get 3 days to debate the draft law.