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COURTIERS Comments on January 2017 Markets

02 February 2017  11:00 GMT    James Timpson

The Supreme Court in London last month declared its ruling on Article 50. The Justices rejected an appeal by ministers against a previous High Court judgment that Britain cannot begin the process of leaving the European Union without Parliament approval. The MPs voted on 1st February, and in the end a large majority (498 versus 114) voted to allow the government to begin negotiations. Meanwhile Theresa May has announced that the government would issue a White Paper detailing the plans for Brexit. She still wishes to begin the negotiations by the end of March.

In the US, Donald Trump has been sworn in as the 45th President of the United States. During his speech he vowed to put an end to ‘American carnage’, by stripping power away from Washington and giving it ‘back to the people’. A few days into his presidency Trump issued an executive order for a 2,000 mile wall to be constructed along the US border with Mexico. Funding would first have to be approved by the US Congress, but Trump was adamant that Mexico would reimburse the entire cost, which is likely to be in the billions.

Despite the controversy surrounding Trump and his policies, his opening week as President did little to subdue financial markets. The S&P 500 index reached an all-time closing high of 2,298.4 towards the end of the month, while one of the oldest market indices of all time, the Dow Jones Industrial Average, broke above 20,000 for the first time ever.

Inflation in the UK continues to surge upwards. According to figures from the Office for National Statistics, the Consumer Prices Index (CPI) rose to a two-and-a-half year high of 1.6% in December, up from 1.2% in the previous month and 0.2% in December 2015. However it is still below the Bank of England’s target of 2%. The recent surge in the CPI is largely due to factories having to pay more for raw materials following the fall in the pound, and subsequently passing the price increases onto consumers.

January was a mixed month for developed equity markets. In the UK, the FTSE 100 index fell -0.57% while the FTSE 250 (ex IT) index and the FTSE Small Cap (ex IT) index picked up +0.37% and +1.22% respectively. In the US, the S&P 500 index gained +1.90% while in Europe the Eurostoxx 50 index lost -1.69%. Japanese equities, measured by the Topix index, ended the month fairly flat at +0.22%.

Emerging market returns were positive. The MSCI EM (Emerging Markets) index saw an increase of +3.98%. Chinese equities, represented by the MSCI China index, surged +6.85% and Latin American equities, measured by the MSCI EM Latin America GR index, gathered +5.28%. The IISL Nifty index, which measures Indian equity returns, jumped +4.59%.

Global bond markets performed less well over the month. UK government bonds, measured by the FTSE Gilts All Stocks index, fell -1.74%, and long dated (over 15 years to maturity) gilts lapsed -3.14%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, were down -0.62% and sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, lost 
-0.95%. High yield returns were better, as the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index returned +0.74% and +1.03% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, increased +1.44%.

Commodities had mixed fortunes during the month. The S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, fell -1.41%. The price of a crude oil contract dipped 
-3.38%. Agricultural returns were positive, as corn and wheat gained +2.20% and +3.13% respectively. The precious metals also saw positive returns, as the S&P GSCI Gold and Silver indices lifted +4.97% and +9.77% respectively.

In the foreign exchange markets, the US dollar experienced some volatility ahead of Trump’s inauguration and ended the month down -1.94% against the pound. It was a better month for the euro and the yen, as they appreciated +0.70% and +1.81% respectively against the pound.

(All the above returns are reflected on a local currency basis i.e. they do not factor in any relevant currency movements.  Unless accompanied by PR (Price Return), they do include income).

Video Transcript

The big news event last month was of course Donald Trump’s inauguration as the 45th President of the United States. Despite all the backlash surrounding his rise to power, market sentiment remained fairly positive. In fact, just a few days after Trump was sworn in as President, the S&P 500 index reached a new all-time high and the Dow Jones Industrial Average broke the 20,000 barrier for the first time in its 120 year history.

That said, Trump’s first week in the White House hasn’t been entirely without controversy as he’s already issued an executive order to build a wall on the Mexican border, and he’s adamant that Mexico will end up paying the bill for it.

Last month the Supreme Court gave its official ruling on Article 50 and in the end they agreed with the High Court judgement that the government would have to seek approval from Parliament before beginning the official process of leaving the EU. Well the vote took place last night and an overwhelming majority of MPs – 498 of them vs 114 – voted to allow Theresa May to start the negotiations. She still hopes to start by the end of March and in the meantime, she’s promised to publish a White Paper detailing the government’s plans for Brexit.

It was a fairly mixed month for developed equity markets, with the US faring better than the UK. The S&P 500 index rose 2% while the FTSE 100 index lost 0.5%. It was a strong month for emerging markets as the MSCI EM (Emerging Markets) index gained 4%. Chinese equities in particular had a strong month, with the MSCI China index surging nearly 7%. This follows a fairly disappointing 2016 in which the China index returned just 1% overall.

In the currency markets, the US dollar faltered slightly as it lost 2% against the pound while other major currencies such as the euro and the yen gained against the pound. Finally, the Consumer Prices Index (CPI), which measures inflation in the UK, has been growing steadily over the last few months and in December, it reached a two-and-a-half year high of 1.6%.

I think it’s fair to say that all eyes are still very much on Donald Trump and his next steps as the President of the US. It’s obviously still very early days into his tenure, and markets won’t necessarily remain bullish for long. Suffice to say there’s plenty of uncertainty ahead and at the moment, we’re taking precautions in our multi-asset funds, duration remains low and we currently have some put options in place protecting us against a major decline in the US equity market.

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