February 24, 2017
Equities Continue To Roll
A review of the week's top global economic and corporate news.
For the week ending 24 February 2017
US equities continued setting records this week — including 10 record daily closing highs in a row for the Dow Jones Industrial Average as of 23 February. Investors remain optimistic that US president Donald Trump will cut taxes, reduce regulation and implement a sweeping infrastructure spending program. The S&P 500 Index is up 5.3% year to date and has gained over 21% over the past 12 months. Market volatility increased slightly this week, but continued to remain relatively low. The yield on the 10-year US Treasury bond fell 2.9% this week to 2.34%, as of early Friday morning. Oil prices remained relatively unchanged this week.
Fed signals potential March rate hike
In minutes released this week, US Federal Reserve officials signaled the potential for a rate hike at its next policy meeting in March. Citing potentially increased spending and reduced taxation under the Trump administration, the minutes suggest that the Fed may act more aggressively to keep a lid on inflation. The central bank increased the federal funds rate to between 0.5% and 0.75% in December and indicated then the potential for three quarter-percentage-point increases this year. Markets are expecting two rate hikes in 2017, and while odds of an increase have risen for March, they still remain low, at around 22%, according to data from CME.
Trump voices support for border tax
Donald Trump said this week that he supports a form of the proposed "border adjustment tax" (BAT), a tax on all imports. Trump suggested that such a tax would entice companies to relocate manufacturing operations to the United States, which would create more US jobs. Retail stocks have been pummeled in recent months over speculation that a border tax would be implemented. The retail industry imports most goods it sells in the US. J.C. Penney announced this week that it would close more than 100 stores, and rivals Kohl's and Macy's announced they would lease some of their retail space to other retailers in an effort to generate more revenue from real estate assets. Under the proposal, US export income would be tax free, which could benefit some energy companies, such as crude oil exporters.
Frexit fears rise on Le Pen's gains
While French presidential candidates François Fillon and Emmanuel Macron still hold commanding leads over Marine Le Pen in the upcoming elections, the right wing candidate has narrowed the gap, according to French polls released this week. Ms. Le Pen favors dropping out of the euro currency, and the markets aren't taking any chances. In reaction to the polls, the spread on French five-year government bonds rose to its highest level since the eurozone debt crisis. Trading volume for credit default swaps on French government debt also surged as spreads spiked. Credit default swaps are held by some investors for insurance against debt defaults. Rising CDS spread levels indicate that investors believe the chance of a default has increased.
Greece open to reforms
Greece agreed to legislate pension and other structural reforms this week, generating some optimism that negotiations on its bailout terms would resume after months of gridlock. Yields on Greek government debt fell to their lowest level in a month, although much work remains to be done.
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News;Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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