The Dow index has hit 20,000 for the first time ever !
On Wednesday, the Dow climbed to new highs…
Here’s how the FT covered the Dow hitting 10,000 on March 16, 1999
Goldman Sachs Group is the best stock in the Dow for now, following JP Morgan chase & Co..
The Strength of the US Stock Market
US stocks have rallied significantly following the presidential election as President Donald Trump increased bullish sentiment on Wall Street. The Trump equity rally continues…
Source: Trading Economics
The North American Free Trade Agreement (NAFTA)
NAFTA is an international agreement that was signed by the United States of America, Canada and Mexico. The aim of deal is to eliminate most trade tariffs between the 3 nations, increase investment and tighten protection. However, President Trump wants to renegotiate NAFTA because he believes that the deal will destroy American jobs. If Trump renegotiates NAFTA, the states whose economies depend on most heavily on trade with Mexico and Canada, such as Michigan, Texas, North Dakota, Kentucky and Indiana will be under pressure..
Trump also withdrew the US from the Trans-Pacific Partnership (TPP) trade deal which was designed to regulate trade between the US, Australia, New Zealand, Canada, Singapore, Vietnam, Malaysia, Japan, Mexico, Peru, Brunei, and Chile on Monday.
US-CHINA TRADE WAR AND US-MEXICO TRADE WAR
Trump threatened to impose high tariffs on Chinese goods. If the U.S. and China impose 45% tariffs on each other, Chinese consumers may boycott U.S. brands. It is clearly seen that the unbalancing trade act will destroy the American consumers if there will be a trade war between China and US.
Very useful article from the Economist :
After these tweets above and Trump’s plans for the Mexico wall, Mexico President cancels US visit to meet with Trump. Moreover, Trump’s secretary said the border barrier would be funded by a 20 % import tax on goods from Mexico. Therefore, the peso has fallen sharply against the dollar again during this week.
US BORDER TAX on ASIA EXPORTS
Useful article here:
According to Credit Suisse, the Philippines and China face the greatest direct risk from such a tax because they have an export mix that’s heavily reliant on electronic and capital goods, which can be easily replaced by US-based producers.
On the other side, US GDP growth slowed to 1.9% in Q4 2016, reached slowest rate since 2011.
The strong dollar hit the US exports and caused the US trade deficit widened. Therefore, the world should avoid a trade war..
Volatility=The Market Price of Uncertainty
I liked the graphs below which include the economic policy uncertainty index. More uncertainty about economic policy leads to the volatility up in the markets.
US DOLLAR AND US TREASURY 10 YEAR YIELDS
The positive correlation between the dollar and Treasury yields started to decline in 2017. After Trump’s election in November of 2016, US treasury yields curve steepened on stronger US growth and high inflation expectations. Treasury yields will be moving higher after the FED will rate hike.
Dollar rally continues and demand for US stocks will result in a higher demand for the U.S dollar.
This is how the dollar can react to price action in Treasury bond yields..
Bank of Japan (BoJ) Move – Print More Money !
Bank of Japan increased its buying in 5 to 10 year bonds in order to bring down their yields. The 10 year Japanese goverment bond yields dropped to 0.070 % on wednesday. The falling in yields pushed the yen lower.
A huge gap between Japan and US government bond yields..
The Japan inflation is still not close the BOJ’s 2% target.
CHINA – A Large Share of Global GDP As Well As Global NPFE Debt..
Source: Moody’s Investor Service
NFPE= Non- Financial Public Enterprises
UK – GDP GROWTH – INFLATION
UK inflation is increasing as rising oil prices and UK GDP growth continues to accelerate despite Brexit uncertainty.
The market is starting to price in a risk premium French assets, so French bond yields are rising above 1% as political election risk in France.
A Mirror of Political Risk !
France’s 5Y Credit Default Swap spreads have retraced about 50 % of the post-Brexit gains following Trump’s election victory. CDS spreads overreact when there is political risk.
European bond yields continue increasing, but they still yield less than nothing despite of European Central Bank’s (ECB) bond buying program.
Very nice summary and useful article which is about bond yields, Brexit, US treasuries, is written by Chris Bailey @financialorbit :
For you and your investments it means you keep holding onto those financial sector shares and gold holdings but also keep the faith that the world will not be a disaster and flop into a protectionist fuzz. If you want to watch anything – even as an equity investor – then watch bond yields as they tell you all you need to know about that big decision whether to buy/hold or sell your investments.
According to Eurostat, Q3 2016 compared with Q2 of 2016 Government debt declined to 90.1% of GDP in Euro Area. Greece, Portugal and Italy have huge public debt to GDP ratio, comparing to others.
Euro and Pound gain against the US dollar..
In 2017, Turkey has still high risk, comparing the other emerging markets while Korea has low risk. Surprisingly ratings agency S&P revised its outlook for Turkey to ‘negative’ from ‘stable’ as rising constraints on policy makers’ ability to contain inflation and currency pressures. Moreover, the other rating agency, Fitch downgraded Turkey’s sovereign debt to ‘junk’ as political and security concerns on Friday. As you can see from the chart below, China is on the risky side and Russia’s sovereign risk of default has declined in recent months..
Portugal’s risk..! Portugal and Turkey CDS spreads are so close to each other…
This graph below which is taken from @joshdigga and shows the emerging currency composition of external debt. Venezuela’s external debt is highly depend on US dollar. Venezuela has the highest risk, comparing the other countries in the world.
Lastly, latest CDS (Credit Default Swap) Spreads for some countries. Rising (or widening) spreads indicate the perceived risk of default is rising. French, Portugal and Italy CDS spreads are widening again this week as rising political concerns. Greece (Hellenic Republic) 5Y CDS spread has blown out in a week.
Source: Markit Economics and Market Watch
Markit CDX credit default swap indexes cover North America and emerging markets. Markit iTraxx credit default swap indexes cover Europe, Asia, Australia and Japan. The indexes are owned, calculated and administered by Markit. For more information visit www.markit.com/cds