INSIGHTS

MARKET SUMMARY: 23 TO 27 JANUARY

Reasearch Team, 27 January 2017

After a cautious week last week when investors worried about two major political events, markets have turned optimistic, with plenty of economic data to process as well as positive results from the global reporting season helping to move markets.

Although we have seen positivity this week, it had a shaky start. Caution came following on from the inauguration of the 45th President of the United States, Donald Trump. Trump’s inauguration speech echoed his pre-election promises to protect American workers saying that “every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.” Initially the market took this as a positive and US share prices appreciated on Friday. However, these gains were undone at the start of this week amongst the political uncertainty that President Trump represents.

Analysts will be watching the first 100 days of the Trump Presidency closely. The post-election rally saw the S&P 500 rise 6.0%, the fifth largest rally since records began. History shows that in the first 100 days of presidency, the S&P 500 has risen 70% of the time for an average gain of 1.6%. However, the odds are against Trump as a republican president, averaging a return of -0.4% and showing gains just 60% of the time.

The highlight on the local calendar this week was the release of the fourth quarter consumer price Index (CPI), which is a measure of inflation. The December quarter showed a 0.4% increase in the CPI, above expectations for a 0.3% increase. On an annualised basis, inflation rose 1.3%. this was in line with market expectations however was above the Reserve Bank of New Zealand’s forecast for headline inflation to be 1.1%. The stronger than expected inflation figure almost certainly means that the Official Cash rate will be on hold for at least the rest of the year and that the next move is likely to be an increase, with a few economists now calling for the OCR to rise before the end of the year.

Inflation in Australia however went in the opposite direction, coming in below expectations for the fourth quarter. The market was expecting a 0.7% increase in consumer prices for the quarter and an annualised rise of 1.6%. However, the data showed just a 0.5% rise for the quarter and a 1.5% gain for the year. The lower than expected inflation could open the door for the Reserve Bank of Australia to cut the official cash rate, should other data show a loss in momentum for the economy.

Global reporting season kicked up a gear this week, with almost 20% of the S&P500 due to report. At the start of the week only 63 companies had reported and of those only 48% had beaten revenue estimates while 75% had exceed expectations for earnings. Investors have been looking for some solid earnings from companies during the reporting season to match current valuations. This week has yielded some strong results from a number of companies which has seen some strong share price gains and boosted US markets to record highs. The Dow Jones Industrial Average pushed through the key milestone of 20,000 during the week, taking just 42 trading days to reach this from 19,000, the second fastest milestone run on record.

Flash Purchasing Managers Index’s (PMI’s) have been released for January during the week for a number of regions around the world. These are initial readings on how manufacturing is tracking around the world and indeed are the first indicators for 2017. A PMI is an indexed figure with readings above 50 indicating expansion within the sector while below 50 would indicate a contraction. The Eurozone’s PMIs showed a slight decline in activity with the index slipping to 54.3 from 54.4 in December.  Japan’s rose to 52.8 showing the fastest expansion in almost 3 years as export orders surged. The US had a reading of 55.1 for January well above expectations and hitting a 22 month high.