Originally published by BetaShares
- After solid gains in recent months, both US bond yields and the US dollar consolidated somewhat in January, in part reflecting concerns with Donald Trump’s trade-protectionist stance. US 10-Year Treasury bond yields ended the month unchanged at 2.45%, while the US Dollar Index dropped 2.6%. That said, Wall Street continued to focus on the potential positives of a Trump Presidency, with the S&P 500 rising a further 1.8% to 2,278. Equity markets were also heartened by signs of strengthening global industrial production and a broadly encouraging corporate earnings outlook.
- The weaker US dollar saw gold prices and global gold mining stocks rise 5.5% and 11.1% respectively in the month, though also produced a more muted performance for European and Japanese equities. Oil prices and the global oil sector were also softer, after a surge in oil prices in the previous month, following OPEC’s decision to cut production.
- Despite the standout strength in resource stocks, the overall S&P/ASX 200 retreated 0.8% last month to 5,260 points. While a further gain in iron ore prices helped push the resources sector higher, the associated rise in the Australian dollar (which lifted 5.2% against the US dollar to US72.9c) hurt the outlook for other sectors, as did some patchy earnings results at the start of the interim reporting season.
- Local 10-year bond yields eased back a little further to 2.71%, helped by steady US bond yields and a cooling in expectations with regard to an RBA rate hike later this year. Market pricing now has the RBA firmly on hold by end-2017, after some risk of a rate hike was priced in during December.
OUTLOOK
- The outlook for equity markets remains encouraging, with corporate earnings in both Australia (at least in the resources sector) and the US starting to lift. Against this, outright equity price-to-earnings valuations are at above-average levels, and remain reliant on bond yields not rising too far too fast. The good news is that despite the tight US labour market, US wage growth continues to lift only modestly, and competitive pressures more broadly are keeping global inflation reasonably well contained.
- That said, the so-far erratic nature of Donald Trump’s Presidency poses both risks and opportunities. His promise of fiscal stimulus and industry deregulation are positive factors, while his geo-political and trade hostilities are clear negative risk factors. On balance though, Trump’s pro-business positives seems likely to outweigh the negatives.
- With the prospect of US fiscal stimulus and further Fed rate hikes, ongoing upward pressure on the US dollar and bond yields seems likely, which favours investment themes such as Japanese equities (such as ASX: HJPN, which would benefit from a weaker yen) and global banks (such as ASX: BNKS, which would benefit from higher bond yields). •Chinese steel sector consolidation is also likely to limit declines in iron ore prices, thereby supporting the local resources sector(ASX: QRE). Yield seeking investors could also continue to support the financials sector(ASX: QFN), as higher bond yields pressure “bond proxies” such as listed property and infrastructure.
