Friday, 15th of June 2018
It is Friday yet again, mid-June and we feel revendicated- The Dollar index is touching on 95, the high for the year and looking solid! The combination of an interest rate rise in the US with promises of more to come this year and the very dovish ECB outlook gave the Dollar some high-octane juices and depressed the Euro. The Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point Wednesday and indicated that two more increases are likely this year. The move pushes the funds rate target to 1.75 to 2 percent. The rate is closely tied to consumer debt, particularly credit cards, home equity lines of credit and other adjustable-rate instruments. The Federal Open Market Committee changed multiple phrases from its previous missives, pointing to a more optimistic view on economic growth and higher inflation expectations. The committee said economic growth has been “rising at a solid rate,” an upgrade from “moderate” in May. The unemployment rate has “declined,” as opposed to “stayed low,” and household spending “has picked up,” an upgrade from “moderated.” With that in mind, the committee said two more rate hikes were appropriate, bringing the 2018 total to four increases. Its first hike this year was in March.
Across the pond and a day later, Mario Draghi said the euro-area economy is strong enough to overcome increased risk, justifying the European Central Bank’s decision to halt bond purchases and close an extraordinary chapter in the decade-long struggle with financial crises and recession. The Euro fell after the central bank also pledged to keep interest rates unchanged at current record lows at least through the summer of 2019, a longer timeframe than investors had priced in. Policy makers will phase out bond purchases by the end of this year in what Draghi described as a unanimous decision.
Across the “other puddle”, China’s economy fell short of expectations and its central bank chose not to follow the Federal Reserve in raising borrowing costs, adding fresh caution on the outlook for global growth as trade tensions with the U.S. escalate. With President Donald Trump renewing threats to impose tariffs on the world’s second-largest economy, May data for industrial output, retail sales and investment all came in beneath economist forecasts on Thursday. The People’s Bank of China kept the cost of reverse-repurchase agreements steady, defying predictions it would track the Fed’s hike of Wednesday. The Bank of Japan also maintained its stimulus today.
And let’s not forget that this week, history was made (just like all weeks)! President Donald Trump and North Korea leader Kim Jong Un signed an agreement aimed at establishing a “peace regime” on the Korean peninsula and better relations between the two states. U.S. President Donald Trump was nominated for the Nobel Peace Prize for his work in reaching an agreement to work toward de-nuclearization of the Korean peninsula. The U.S leader was nominated by two members of Norway’s governing Progress Party, according to state broadcaster NRK. The deadline for this year’s prize passed in January, so this nomination would make him eligible for next year. OK, we are not impressed. Obama was nominated together with his inauguration…
Away from politics, U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate. The Labour Department said on Wednesday its producer price index for final demand rose 0.5% last month, boosted by a surge in gasoline prices and continued gains in the cost of services. The PPI edged up 0.1% in April. In the 12 months through May, the PPI increased 3.1%, the largest advance since January 2012. The renewed upward trend in producer prices strengthens expectations that inflation will pick up this year and likely breach the U.S. central bank’s 2 percent target.
The Nasdaq composite jumped to an all-time high on Thursday as deal making activity lifted technology and media shares. The tech-heavy Nasdaq rose 0.9% to 7,761.04 with Facebook also reaching a record high. Netflix and Alphabet also contributed to the index’s gains. The S&P 500 also closed higher, climbing 0.3% to 2,7872.49. Yes, we feel revendicated here as well…
Bitcoin extended losses, bringing its four-session slide to as much as 20%, as questions mount about whether the world’s biggest cryptocurrency was manipulated during last year’s record price surge.
On the interest-rates front, U.S. government debt yields rose Wednesday after the Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point and indicated that two more increases are likely in store. The 2-year yield hit its highest level since 2008 and the yield on the benchmark 10-year Treasury note rose to 3%, following the Fed’s announcement. The yield on the 30-year Treasury bond was also in the green at 3.095 percent while the 5-year yield hit a fresh high of 2.857. Bond yields move inversely to prices. Yields came back slightly after their initial rise. The 10-year yield fell back below 3 percent, to around 2.92% as we write and the 30-year yield pared gains to about 3.05%. We did suggest that one stays at a distance from duration exposure… we reiterate this view yet again!
We may have found an explanation for Trump’s placing levies and duties left and right! The U.S. posted a $146.8 billion budget deficit in May, the largest for the month since 2009, as revenue declined. The budget gap rose 66% last month from a year earlier, the Treasury Department reported on Tuesday. Spending rose by 10.7% to $363.9 billion, compared with a 9.7% fall in receipts to $217.1 billion. The government is facing increasing borrowing in the coming years partly due to tax cuts enacted this year and the strain on social and health spending from an aging population. For the first eight months of the fiscal year, the fiscal gap widened to $532.2 billion, up 23% from last year’s $432.9 billion deficit. Tax and spending measures approved by President Donald Trump are expected to push the budget deficit to $804 billion in the current fiscal year, from $665 billion in fiscal 2017, and then surpass the $1 trillion-mark by 2020. Well, Trump is sending billion Dollar bills this way and that, “Penny billed is a Penny earned” paraphrasing his granny’s adage… The “other” deficit plaguing America since forever is the Trade balance. The U.S. registered an annual deficit of more than $330 billion with China and about $550 billion with the world last year. This statistic has fuelled Trumps anger and brought his response via tariffs. But wait a minute, The U.S. has a surplus of $20 billion with China and $1.4 trillion with the rest of the world. Just looking at the goods and services trade deficit is misleading and doesn’t capture the true size of U.S. business interests, according to Deutsche Bank economists. While trade and corporate data aren’t usually combined, if you add up all trade data, sales by U.S. companies in foreign countries and foreign firms in the U.S., “U.S. companies have sold more to the rest of the world than other countries have sold to the U.S. in the past ten years,” writes chief China economist Zhang Zhiwei in the report. Not all economists subscribe to this view of deficits…
We worry that Trump has seen this Charles Dudley Warner quote “Everybody talks about the weather, but nobody does anything about it” and that he might try to fix it…
We leave you with a smile, supported by Paul Tudor Jones, the legendary hedge fund manager who called the October 1987 crash, and believes the stock market will rally near the end of this year. “I think we’ll see rates move significantly higher beginning sometime late third quarter, early fourth quarter, And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year” Jones said. Earlier this year in an interview with Goldman Sachs, the hedge fund manager also predicted a rise in inflation and a surge in the U.S. 10-year Treasury yield.
Market Weekly Highlights
Currencies & Commodities
Fixed Income
Equities
DISCLAIMER
Information included in this newsletter is intended for those investors who meet the Financial Conduct Authority definition of a Professional Client or an Eligible Counterparty or for those investors who meet the CISA/CISO definition of a Qualified Investor. The content of this newsletter has been approved and issued by Bedrock S.A., Bedrock Monaco SAM, and Bedrock Asset Management (UK) Ltd. (jointly, hereafter, referred to as “Bedrock”) for information purposes only and does not purport to be full or complete. No reliance may be placed for any purpose on the information contained in this newsletter or its accuracy or completeness. Any opinions contained in this newsletter may be changed after issue at any time without notice. No information in this post should be construed as providing financial, investment or other professional advice. The information contained herein is for the sole use of its intended recipient and may not be copied, distributed or published without Bedrock’s express consent. No representation or warranty of any kind, implied, expressed or statutory, is given in conjunction with the information and data. Bedrock expressly disclaims liability for errors or omissions in the information and data contained in this newsletter. The value of all investments and the income derived therefrom can fluctuate due to market movements. Past performance is no guide to, or guarantee of, future performance. Bedrock accepts no liability for any loss or damage arising out of the use or misuse of or reliance on the information provided in this newsletter including, without limitation, any loss of profits or any other damage, direct or consequential. You agree to indemnify and hold harmless Bedrock and its affiliates, and the directors and employees of Bedrock and its affiliates from and against any and all liabilities, claims, damages, losses or expenses, including legal fees and expenses arising out of your access to or use of the information in this newsletter, save to the extent that such losses may not be excluded pursuant to applicable law or regulation. This newsletter and the information contained herein are confidential. The copyright, trademarks and all similar rights of this newsletter and its contents are owned by Bedrock.
In March's news roundup, we look at some of the big deals and trends in the London office market, which has seen a very active month driven by the return of private equity (PE) buyers seeking to take advantage of discounted pricing. We highlight some of the biggest deals and what these mean for the capital.
As families expand, diverse perspectives, voices, and expectations emerge. Each generation brings unique dynamics and values, shaping the family business's future. We offer three key considerations for grooming future leaders within the family business context.
In this market update, we discuss the strength of the equity rally this year, the end of ultra-easy monetary exceptionalism in Japan, and the investment case for gold.