7 February 2017

A steady start

It has been a relatively steady start to 2017 from a market perspective.

As we commented at the end of last year, we believe that the global economy is in reasonable health and this view has been supported through January by generally positive economic readings and rising commodity prices. Chinese authorities succeeded in catching markets off-guard early in the month, strengthening the renminbi’s trading range by the most in more than a decade, causing the currency to rally strongly. Consensus opinion remains that the renminbi will weaken through 2017, as it did last year, however this was a timely reminder from China that they have a significant monetary arsenal at their disposal and, more importantly, are willing to use it.

While 2016 began with all eyes on the Fed, it seems that markets are more interested with Donald Trump for now. The President has certainly wasted no time in delivering on his campaign pledges and, for the time being, US markets seem to be looking on the positive side. We agree that Trump’s promised fiscal reflation is a welcome antidote to years of unimaginative monetary policy, but the other side of the Trump coin shows popular nationalism, trade protectionism and plenty of confrontation. It is far too early to tell which side will come through.

We see increasing inflation and potentially complacent central bankers as a key risk to markets this year. Inflation is rising and, on the basis of their Janu ary statements, Carney, Yellen, Kuroda, et al are in no rush to move away from their exceptionally dovish current position. On the basis that inflation is still running at relatively low rates, there should still be scope to “normalise” monetary policy without causing a market upset, but this inaction remains a concern.

The current positive economic momentum should prove a tailwind for corporate profitability in 2017. Combined with steadily rising inflation, this environment ought to help support equity markets at current high valuations, while presenting challenges to fixed income investors. We are nearing a string of major European elections where we will find out if 2016’s political populism has spread to the Continent and the recent weakness in French sovereign bonds certainly suggests some nervousness. We would be surprised if volatility remains at current low levels as we approach the major political events.

Fred Mahon is the fund manager of JM Finn’s Coleman Street Investments service. Click here for more information

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