Markets climb as investors watch US healthcare bill

Instreet Market & Economic Commentary and Opinion

US and global stocks are trading at record highs as markets continue to climb a wall of worry. Also volatility continues to fall rapidly and the VIX (Chicago Board Options Exchange Volatility Index) is back to the near-low levels it reached a few months ago. Of course, whilst investment sentiment is improving, it is nowhere near euphoric.

Markets will keep a close eye on the US Senate this week to see whether it passes the new US healthcare bill. Getting this bill through the senate is a test case for the Trump administration. If the Republicans are successful in winding back Obamacare, they will have a greater chance of getting their next major initiative – tax reform – passed.

As for rates in the US, expectations for when the next rise will occur have changed significantly following comments by US Federal Reserve (Fed) Chair, Janet Yellen, along with weaker-than-expected CPI figures.

That said, the Fed cannot ignore the unemployment rate which is 60 basis points lower than when they first lifted rates in 2015. A series of strong employment reports could quickly change the situation – like what occurred in 1994 to1995 when the Fed began raising rates in a mild inflationary environment due to strong labour market conditions.

The US economy also continues to grow, with data from Friday showing that industrial output grew by 0.4% month-on-month in June. Consumer confidence is at reassuringly elevated levels and we expect the strong labour market will help drive consumer spending.

Canada rate rise prompts currency moves

The Canadian Dollar rallied last week after the country’s interest rates were raised. The move prompted a sell-off in the US Dollar against all major currencies, especially the Yen and Euro.

The euphoria around this rate rise should die out quickly as it’s unlikely we’ll see further interest rate hikes in Canada for another 12 months. The strength of the Canadian Dollar should also come off in line with expectation changes. The US Dollar should regain its strength, supported by the country’s strong labour market which will affect expectations of interest rate rises in the US.

The Australian Dollar (AUD) also benefited from the Canadian currency surge, although the rebound is likely to be short lived as it is driven by a renewed optimism in global growth and the AUD is a proxy for global growth – especially when led by China.

Speaking of China, Q2 GDP figures should tell us little that we don't already know – that is, growth remained stable last quarter. Fixed asset investment may have softened given slower credit growth and weaker demand, whilst growth in industrial production is likely to have edged down. Meanwhile, retail sales ought to have continued growing at double-digit rates given buoyant consumer confidence.

Looking at national accounts, China's export growth accelerated from 15.5% year-on-year in May to 17.3% last month in renminbi terms. Meanwhile, import growth edged up from 22.1% year-on-year to 23.1%. These figures help to confirm the global growth story. Looking ahead, exports should continue to do well given the positive outlook for China's main trading partners.

A final word on oil

Brent oil settled at $48.91 a barrel last week, taking its gain to 4.5% for the week. Prices are being helped by expectations that growing oil demand could help reduce a global oil glut by the second half of the year. The wild card for the price of oil is production in the US, with the US oil rig count rising for a second successive week (albeit at a slower pace).

 

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