RECAP: For the week ending November 18

November 20, 2016

last week most of the major benchmarks were spurred to all-time highs. The smaller-cap benchmarks, which are typically more volatile, built on their lead for the year to date and performed best. The technology-heavy Nasdaq Composite Index established a new record early Friday but fell back in late trading and ended the week slightly lower.

President-elect Donald Trump and his policy continue to drive the market. The impact on financials was perhaps clearest to perceive in these early days, the effect of President-elect Donald Trump’s plans on other segments remained uncertain. For instance in health care some companies saw a bump from the news that Hillary Clinton would not be pursuing them, leaving them with their pricing power for now. On a broader scale it remains to be seen what Trump plans to do with the Affordable Care Act which should have a greater affect on the industry as a whole. In testimony before Congress on Thursday, Federal Reserve Chair Janet Yellen seemed to confirm that recent economic signals have been strong enough to prompt the Fed to raise rates at its December 13–14 meeting, noting an increase might come “relatively soon.”

In Europe, stocks closed the week flat to slightly lower, with Italy and Spain recording steep declines. Utilities, energy, and basic materials shares dragged, hurt largely by U.S. dollar strength. The euro ended lower for the week against the dollar, extending its longest losing streak since it started trading in December 1999. Nearly 60% of the companies in the pan-European benchmark Stoxx 600 beat earnings estimates. Quarterly earnings season has largely come to a close.

During the week, speculation rose that UK Chancellor of the Exchequer Philip Hammond would forecast that the country faces at least a £100 billion budget deficit due to Brexit within the next five years. The statement will be followed closely by the markets amid speculation that the UK government may be about to embark upon a major shift from monetary to fiscal stimulus. The move may signal the beginning of a global refocusing of policy toward fiscal measures in developed markets.

European Central Bank (ECB) President Mario Draghi signaled that the bank’s bond purchasing program might be extended next month given the eurozone’s continued economic weakness. At a banking conference this week, Draghi warned that the ECB needed to continue to use “all instruments available” until inflation sustainably accelerates. Eurozone inflation was just 0.5% in October, well below the ECB’s target of just under 2%.

In Asia Japanese stocks posted strong gains. The widely watched Nikkei 225 Stock Average advanced 593 points to 17,967.41, or about 3.4%. The blue chip index is still down about 5.6% for the year to date. The broader TOPIX Index and the Topix Small Index advanced slightly more than the Nikkei for the week and are down a bit less for the year to date. The yen weakened to ¥110 per U.S. dollar on Friday, its lowest level since early June, after the dollar recorded its strongest two-week gain versus the yen since 1988.

President-elect Trump met with Prime Minister Shinzo Abe on Thursday. Abe’s goal is to salvage at least part of the Trans-Pacific Partnership (TPP), a 12-nation trade agreement that is important to the prime minister’s economic agenda. During Trump’s campaign, he pledged reject trade deals that move jobs overseas, and he has a history of harshly criticizing Japan’s trade policies.

The Chinese yuan hit an eight-year low during the week, raising speculation that Chinese policymakers were adopting a hands-off approach toward the currency in the wake of the U.S. elections. The yuan fell to ¥6.8729 versus the dollar Wednesday, marking its lowest level since December 2008, in the government-controlled mainland market. It fell even further in Hong Kong, where the yuan trades freely in the so-called offshore market, to a record low.

Uncertainty about Trump’s Asia policies and the future of U.S.-China trade relations were behind the yuan’s weakness, according to some analysts. During the campaign, the president-elect said that he would label China as a currency manipulator and slap tariffs on Chinese imports to the U.S., though the extent to which such pledges will be implemented again remains uncertain. Meanwhile, expectations of higher U.S. interest rates and continued strength in the dollar—which rallied in the wake of Trump’s win—also contributed to downward pressure on the currency, leading several global banks to lower their year-end yuan forecasts.

 

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