RECAP: for the week ending March 24th

March 26, 2017

Tuesday marked the first time in 109 trading days that the S&P 500 Index closed down 1% or more. The decline came amid uncertainty over whether Congress would pass a new health care law, concern over the pace of central bank interest rate increases, and anxiety around the reflation trade. Stocks steadied on Wednesday and Thursday and waffled on Friday with no resolution to the closely watched vote on the health care bill before the market close. Many analysts suggested that the Trump administration’s difficulty in successfully negotiating with a Republican Congress to replace the Affordable Care Act (ACA) amounted to an early test of its ability to shepherd other domestic initiatives through Congress, including substantial infrastructure spending and tax cuts.

After weeks of negotiations, the president told fellow Republicans on late Thursday that he was done bargaining and that if the bill failed to pass, he would move on to his other agenda items. On Friday, after the market closed, the Republican House of Representatives withdrew the legislation, acknowledging that it did not have sufficient support to pass.

Analysts continue to think that the Federal Reserve is on track to raise interest rates twice more this year, and Fed officials said little to dispel that outlook in various speeches.  The latest Reuters poll projects the U.S. 10-year Treasury yield at 2.90% in 12 months, with the highest forecast at 3.50%. Municipal bonds posted positive returns and outperformed Treasuries and the broad fixed income market. Investment-grade corporate bond issuance was lackluster, with only a handful of new deals announced.

In Europe many indexes began the week marked by low volatility and low volumes as investors seemingly awaited more information on key events, including televised debates between candidates running for office in the upcoming French elections and Brexit news, as well as a crucial health care reform vote in the U.S. On Wednesday, European stocks fell to their lowest point of the week, with banks (many of which have operations in the U.S.) hit hardest following a sharp sell-off in U.S. stock markets. A terrorist attack outside of the British Parliament building also hurt sentiment. On Thursday, the Stoxx 600 pan-European index rallied after three days of consecutive losses, with bank, travel, and retail stocks buoyed by stronger economic data reports.

In Japan, stocks declined in the 4 day trading week (closed Monday) and the yen continued to strengthen, closing about 5.1% stronger than the ending 2016 price. The Bank of Japan (BoJ) minutes from its January 30–31 policy meeting showed that board members were mostly bullish that consumption and retail prices would trend higher, although the pace of achieving the central bank’s inflation 2% target could be slow. Several BoJ policy committee members expressed doubt that the core consumer price index, excluding fresh food, will reach the 2% goal in the current three-year projection period ending March 31, 2019. Even the most optimistic members remained worried about wage growth, which will mark its fourth year of gains in 2017. Steady yen appreciation against the U.S. dollar over the past two weeks is partly the result of U.S. dollar weakness in response to concerns relating to the Trump administration’s ability to enact domestic spending and tax programs and uncertainty about the path of U.S. interest rates. Japan’s trade surplus for February, ¥813 trillion, was well above the forecast. Exports rose 11%, while imports gained 1%.

In China, an OECD report warned that China’s economic growth will gradually slow in the next two years, but an increasingly frothy housing market and rising corporate debt are among the risks that could destabilize the economy. China’s annual economic growth will hover above 6% for 2017 and 2018 as stimulus measures and consumption offset a decline in industry and slower investment growth, the OECD forecast in its latest survey of China. However, soaring property prices in many cities and leveraged investment in asset markets “magnify vulnerabilities and the risk of disorderly defaults,” the research group added.

Other markets: The European Union and 20 countries, including Saudi Arabia and China, have temporarily banned beef and chicken imports from some manufacturing plants in Brazil, the world’s largest beef and poultry exporter. Mexican stocks hit an all-time high on the back of the weaker peso, which has helped exporters. The continued strengthening of the U.S. economy, which benefits Mexican manufacturers, along with stabilization in oil prices and more dovish comments from the Fed over the pace of future interest rate increases are also helping sentiment toward Mexican stocks.

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