Week of October 17, 2016
Markets across the world retreated last week, giving up some of their year-to-date gains. Domestically, all three of the major indices closed last week in the red with the NASDAQ Composite the clear underperformer at -1.46% for the week.
Internationally, European and Emerging Markets equities suffered the greatest losses with the MSCI Europe and the MSCI Emerging Markets benchmarks closing out last week -1.45% and -1.94%, respectively. For this week's commentary, we look at two currencies, the British pound and the Chinese yuan. We also dissect the Federal Reserve's meeting minutes released last Wednesday. Lastly, we conclude our commentary with a short story on a boy who made a simple but costly mistake using Google's AdWords service.
Pound Under Pressure
The pound plummeted last week to $1.22 relative to the US dollar, its weakest point since 1985, as fears of a ‘Hard Brexit’ sent jitters across foreign exchange markets. As we have noted before, Britain’s departure from the European Union (EU) will not change its currency, rather it will change its trade agreements with the EU and other countries. A 'Hard Brexit' would imply Britain leaving the EU quickly with no institutional or political relationship with the Union. Britain would then have to negotiate free trade deals with the EU as well as the country's other trade partners and that is where the uncertainty lies. It is entirely possible that Britain will negotiate new trading agreements to their advantage but, until that happens, there is fear despite most of the UK’s economic data coming in above the long-run average. The FTSE 100, on the other hand, soared higher, benefitting from the fall in the pound. A weaker currency tends to help exports and make overseas earnings more valuable to British companies.
Source: CNBC. Vertical axis: USD/GBP
Beneath the Weakening Yuan
The Chinese Yuan has steadily depreciated over the year and is down roughly 3.9% year-to-date and 0.7% last week against the US dollar. We mentioned a weaker currency generally makes for cheaper exports and the weaker yuan should have been good for Chinese sales. However, September exports contracted 10% year-over-year, even as the yuan fell almost 8% in trade-weighted terms, highlighting a broad global downturn in consumption and investment. Imports were down 1.9% as well, fueling worries about domestic appetite and demand. The devaluation could be signaling further deterioration in the Chinese economy as the export weakness coincides with a clampdown on surging home prices and corporate debt. What's more, analysts are estimating further depreciation for the yuan which is already near a six-year low. The depreciating yuan is could be a threat to the global economy as it masks problems associated with an over-leveraged Chinese economy.
Spotlight on Fed Minutes
At their September meeting, Fed policymakers voted 7-3 to leave interest rates unchanged and market participants were waiting for last Wednesday's release of the meeting minutes for clearer hints on future policy actions. The minutes released on Wednesday noted that, while the decision was to wait on tightening the policy, it was a “close call” and policy makers indicated it would be appropriate to raise rates “relatively soon.” US interest rate futures are pricing in about a 65% chance of a rate hike by December, lower than 70-75% chance prior to the release of the minutes. Most of the key FOMC members are of the opinion that "there could be greater scope for economic growth without putting undue pressure on labor markets", possibly leading to the slight dampening in expectations. Aside from the futures expectations, the markets seem to be preparing for a hike in December. Home loan refinance applications, which are highly rate-sensitive, have been falling for weeks and were down another 8% last week. According to the Mortgage Bankers Association, total mortgage application volume declined 6% for the week ended October 7 as compared to the previous week.
Fun Story of the Week
A few letters in a different order can make a monumental difference. Take Jose Javier from Spain, for example, who mistakenly used Google's AdWords rather than AdSense. Javier, a 12 year-old budding brass band musician, turned to Google to earn some spare change for his band-mates by opening up an AdWords account which hosts ads on one's website to earn money. However, that's not exactly how AdWords works. Rather, AdWords is for those looking to advertise at a per-click cost by pushing ads above search results. AdSense is really what Javier was looking for but he only found out after running up a $100,000 bill with Google. Fortunately, Google saw this was all an honest mistake and wiped the slate clean for the 12 year-old who learned a very valuable lesson.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
A share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
MSCI EM (Emerging Markets) INDEX
The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
CNBC, October 2016. http://data.cnbc.com/quotes/GBP%3D
The Guardian, October 2016. https://www.theguardian.com/world/2016/oct/06/google-waives-100000-bill-that-12-year-old-ran-up-online
Huffington Post, June 2016. https://www.huffingtonpost.com/roxana-maddahi/brexit-in-plain-english_b_10671984.html
The Guardian, July 2016. https://www.theguardian.com/uk-news/2016/jul/14/whats-the-best-brexit-theresa-may-could-get-for-britain
BBC News, October 2016. http://www.bbc.com/news/business-37549685
Bloomberg, October 2016. http://www.bloomberg.com/news/articles/2016-10-12/fed-minutes-suggest-yellen-made-the-difference-in-close-call
CNBC, October 2016. http://www.cnbc.com/2016/10/12/mortgage-applications-drop-as-rising-rates-take-a-toll.html
CNBC, October 2016. http://www.cnbc.com/2016/10/12/with-no-rate-hike-risks-to-economy-up-appreciably-ex-fed-advisor-says.html
Seeking Alpha, October 2016. http://seekingalpha.com/article/4012074-global-economy-mean-reverting-post-credit-bubble-world