We start this week off in a similar manner to the last, where dollar strength and rising US bond yields continues to weigh on Asian shares and emerging markets. The worry here for these regions is that investors will start moving funds out of these markets and put it back into the now more attractive US market. Since Trumps Presidential victory we have seen markets turn to the US on the back of Trump’s promise to stimulate growth by expanding fiscal policy by tax cuts and infrastructure spending. This has been taken very positively by the market with analysts predicting higher inflation and therefore higher rates in the future. We saw the US 10 year Treasury yield rise to 2.364 percent, up over 50 bps (equivalent of 2 standard rate hikes) since before the US election. This jump was assisted by the New York Reserve president William Dudley who on Friday was quite bullish on the central banks inflation target, stating that it would be met in the “next few years”.
This Trump rally is of course before ‘The Donald’ even takes up his position in the White House. Investors here may be acting somewhat prematurely as Trump has several promises to stand by. If we don’t see him act on these in the months after he takes office, we may see markets begin to re-correct themselves.
Over in the UK and according to papers this morning, Prime Minister Theresa May will look to cut corporation tax to amongst the lowest in the world’s 20 largest economies. She is even rumored to be looking at undercutting Trumps 15 percent rate, which he promised during his campaign. Such a cut will no doubt be of concern to EU nations, particularly Ireland, who have come into question around their own low rate.
In the Eurozone, and we have the all-important Italian referendum coming up on Dec 4th. After both Brexit and Donald Trump surprised markets, analysts are now preparing for the return of the Eurozone crisis. If current Prime Minister Matteo Renzi fails to steer his party to victory, then questions will no doubt be raised on Italy’s future participation in the Eurozone. We will continue to keep you a breast of this in the coming weeks.