Europe
We’ve seen a turbo charged start to the month on the back of US President Donald Trump’s pledge to spend up to $1trn on rebuilding the infrastructure of the United States, with the FTSE100 and FTSE250 both making new record highs, as the reflation trade takes another leg higher.
With senior Fed officials talking up the prospect of a US rate rise just prior to Mr Trumps speech last night, markets are riding a wave of optimism that increased spending will boost inflation, which in turn will boost returns for construction and manufacturing companies, while higher rates will boost financials.
This pledge has maintained the momentum behind the recent share price rises of companies like CRH (LON:CRH), who have a significant US presence, and make asphalt as well as manufacturing a wide range of building and construction materials, while also boosting international equipment rental company Ashtead (LON:AHT), who get over 90% if its revenue from the US, and rent out construction equipment.
This morning’s results from CRH reinforced this exposure as its US business grew by 5%, though an improvement in Europe also helped.
Terrestrial broadcaster ITV (LON:ITV) saw a decent increase in revenues in 2016 to £3.5bn; however pre-tax profits slid back to £553m, as the company warned that lower advertising revenue was likely to continue to weigh on its numbers. The company went on to state that economic uncertainty would remain a drag on this part of the business, having seen a decline 3% in 2016.
While this is a worry and may well be as a result of economic uncertainty, it may also be as a result of changing habits on the part of viewers. With more and more viewers recording their TV content on PVR’s and then using the skip function during the ad breaks, what company wants to pay for advertising that is likely to be fast forwarded?
On the plus side ITV studios continues to show decent returns with revenue rising 13% to £1.38bn as productions like “Victoria” and “Mr Selfridge” prove popular.
On the downside gold miners have proved to be a drag as the increasing odds of a Fed rate rise sent gold prices sharply lower, with Fresnillo (LON:FRES) and Randgold Resources (LON:RRS) near the bottom of the FTSE.
US
US markets opened at new record highs today pushing the Dow above the 21,000 level, helped by a gains across the board on financials and industrials, however while the pledge to spend $1trn is a laudable one, a serious obstacle remains, namely that of the US Congress, which still has to agree to a new debt ceiling limit by the 15th March.
Once again markets are looking at this through rose tinted glasses expecting that a Republican controlled house will simply wave this through, while we still have little in the way of detail in terms of tax policy.
On the companies front electronics retailer Best Buy announced profits that came in above expectations, though revenue fell short. The company also warned on the outlook for 2017. Later today we’ll find out the level of where new IPO Snap will start trading when it launches on the NYSE tomorrow. Given today’s optimism and the fact that the IPO is oversubscribed suggest we could get a positive start to trading. Whether that is sustainable is another matter.
The latest US inflation data for January on the Fed’s preferred measure was stable, coming in at 1.7%, while the latest income and spending data showed that rising inflation was starting to pinch consumer spending. Real personal spending declined 0.3% in January.
ISM manufacturing saw further gains in February, coming in at 57.7, well above expectations, with new orders rising, and prices paid remaining strong.
FX
A sharp increase in the prospect of a US rate hike in two weeks’ time has seen the US dollar continue its recent upward momentum.
Two year yields hit their highest levels since August 2009 today at 1.3%, as expectations of a move this month have jumped sharply in the past week, from 36% to 82%, on the basis of recent comments by senior Fed officials about the prospects for higher rates, with the normally dovish New York Fed President Bill Dudley the major driver of this recent change in expectations.
If the Fed now don’t move in March it would be sensible to ask why Fed officials felt the need to raise expectations in such a manner in the first place. In a sense they’ve now boxed themselves into a corner, and run the risk of losing credibility if they fail to act in two weeks’ time.
A bigger than expected rise in German inflation to 2.2% in February has given the euro a boost on a expectations that the ECB may well be forced to acknowledge that a taper may be required sooner than markets might think when they meet next week to decide on their latest policy decision.
The pound has dropped and held below $1.2400 for the first time since mid-January after the latest manufacturing PMI dropped to a three month low of 54.6, missing expectations of a fall to 55.7. Higher inflation in Germany and the prospect of a US rate rise isn’t helping either.
Commodities
Oil prices are slightly higher today on the back of expectations of higher demand in the wake of last night’s speech by President Trump, but they remain constrained by the fact that inventories remain at record levels and some uncertainty as to whether the OPEC cuts are actually as comprehensive as first led to believe.
We have been told that OPEC compliance is at nearly 90%, yet according to independent data crude shipments from Iran rose to their highest level since October last month, while another report showed that OPEC output rose in February to 32.24m barrels a day. This would suggest someone is not being entirely honest with the markets.
Gold is on course for its third successive daily decline as markets start to price in the prospect of a US rate rise this month.
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