RECAP: for the week ending January 20th

January 22, 2017

Stocks traded slightly lower during a shortened week as investors kept a close eye on potential changes from Donald Trump’s inauguration on Friday. The political uncertainty may have kept trading volumes relatively light through most of the week, despite the arrival of many closely watched fourth-quarter earnings reports. Trading after the Tuesday seemed to be largely in response to the upcoming election Many of the stocks that have done best since his election. Many sectors that are expected to benefit from a Trump administration under performed, while sectors that have lagged did better. In particular, financial shares, which have benefited from hopes for deregulation and improved lending margins, pulled back sharply as investors appeared to doubt whether Trump’s plans would come to fruition. Better earnings out of Morgan Stanley failed to improve sentiment in the sector. Conversely, defensive stocks reversed recent poor performance and fared better, with consumer staples and utilities stocks both recording good gains.

A better-than-expected earnings report from Netflix on Wednesday similarly seemed unable to drive much of a reaction in Internet-oriented stocks or the overall market. Instead, politics again took center stage as Trump’s Commerce Secretary nominee Wilbur Ross, in his confirmation testimony, promised to address NAFTA soon after the inauguration. Ross also suggested that the administration might raise tariffs on Chinese steel and bring anti-dumping actions against the country. The Mexican peso fell in response, while U.S. steel stocks jumped.

In Europe the UK Prime Minister Theresa May announced early in the week that she will put the final Brexit deal to a vote (which means that parliament could block the deal), and she made it clear that she wanted the UK to trade as a single market as part of the European Union (EU) but maintain control over other issues such as migration and free movement of labour. The European Central Bank (ECB) kept interest rates and its monetary stimulus program unchanged at its January monetary policy meeting during the week. At a press conference following the announcement, ECB President Mario Draghi was dovish on eurozone inflation risks.

In Japan the market is vacillating daily in sync with the strength and weakness of the yen versus the U.S. dollar and its major trading partners. A strong U.S. dollar increases the earnings for Japanese exporters that are paid in dollars; a weak yen makes Japanese exports more affordable for buyers outside Japan. When the yen strengthened to ¥112 per U.S. dollar early in the week, Japanese stocks, paced by its exporters, tumbled. However, toward the end of the week, as the yen renewed its weakening trend, stocks regained their footing and recovered. U.S. President Trump, who was inaugurated on Friday, has stated that he feels that the U.S. dollar is too strong and that U.S. exporters are suffering

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