By Tom Weston
Global stock market indices reached new highs this week. The recent rally is largely a consequence of the election of President Trump, with his economic policies – tax cuts, infrastructure spending and financial deregulation – expected to improve economic growth prospects for the US. The FTSE All-World share index broke its previous record reached in 2015, having risen 8.5 percent since Trump’s election in November.
Testifying before Congress earlier this week, Fed Chair Janet Yellen again stated her expectation of the need for interest rate rises later this year. The benchmark Federal Funds Rate was already expected to be raised multiple times this year from its current level of 0.50-0.75 percent, and the result of the presidential election has led to increased inflation and growth expectations, reinforcing the need for monetary tightening. A renewed bout of optimism regarding European equities also played its part in the global rally.
The European Commission upgraded 2017 growth forecasts for both the Eurozone and the wider EU, to 1.6 percent to 1.8 percent respectively, with improved prospects for the UK playing an important role in the latter. Many forecasters predicted a recession in the event of a vote to leave the EU, however, consumer spending held up remarkably well in the second half of 2016, with total annual GDP growth estimated at 2.0 percent. The commission now predicts 1.5 percent growth for the UK in 2017, up from its autumn prediction of 1.0 percent.
A weak Yen towards the end of the year helped Japan register GDP growth of 1.0 percent for 2016. Net exports increased in the last quarter, largely as a consequence of the Japanese Yen having weakened against the US Dollar since the presidential election. This has cheapened the relative cost of Japanese goods, leading to an increase in Japan’s trade surplus with the US. The strong dollar is bad news for Donald Trump, who has vowed to get rid of America’s overall trade deficit over the course of his presidency.
Opec reported optimistically this week on the cartel’s recent efforts to stem oil production. After two years of low prices and minimal market intervention, the group came to an agreement in November to limit supply as it attempts to increase the price back up to pre-2015 levels.
The week ahead:
- Eurozone finance ministers are to meet on Monday to discuss the latest problems with the bailout of Greece. The IMF is becoming increasingly frustrated with the EU’s insistence of further austerity for Greece as it struggles to grow its way out of what is in their view an unsustainable national debt.
- Bank of England Governor Mark Carney testifies before parliament’s Treasury Select Committee on Tuesday, where he is expected to talk about the UK’s recently upgraded economic forecasts and the future path for monetary policy.
- Finance minister Pravin Gordhan will deliver South Africa’s yearly budget on Wednesday. Tax rises are expected to prevent its credit rating being reduced to junk status. What was recently a promising emerging market economy has stagnated under President Jacob Zuma, who is beset by corruption allegations.
Featured image by htmvalerio/Flickr.
Graphs by FT Market Data.