In addition to rounding up the week’s important issues in the financial markets, we’ve also added brief thoughts on what effects on wealth and investment management you should watch for, which we’ll continue to highlight each week.

Market Action:

The nature of market uncertainty seems to have shifted from a cloudy economic outlook to a volatile geopolitical environment. Over the past week, President Obama has threatened retaliations against Russia over its alleged U.S. election meddling, President-Elect Donald Trump further antagonized China over the question of Taiwan, and the Chinese government seized a U.S. naval drone in the South China Sea. In contrast, economic news was largely unsurprising; the Federal Reserve hiked interest rates in the U.S. as expected (redline of statement here) and signaled an optimistic tone on inflation and the labor market. By the Fed’s “dot plot”, the FOMC indicated that it expects three hikes next year, and markets are now pricing yields in line with the Fed messaging. The dollar also rallied to 14-year highs as a result. The optimism relies on the thesis that public policy will not destabilize markets in the meantime, which both current tax proposals to penalize U.S. imports and to recreate manufacturing jobs that were lost to rising productivity could do.

Geopolitics look especially likely to damage global trade. China in particular has been in the crosshairs this week, given an EU decision allowing assessment of higher import taxes on Chinese goods, WTO action that pushes China closer to trade war, and increased challenges to the renminbi as a global trade currency. The U.S. rate hike also caused a spike in local yields. The Chinese central bank responded by injecting more liquidity to prevent a credit crunch and to defend the yuan. As a result, China is no longer the largest holder of U.S. foreign debt, which bodes poorly for longer-term U.S. borrowing costs. New satellite images indicating that the Chinese government has installed weapons on all seven artificial islands in the South China Sea have only inflamed tensions. Against this backdrop of rising tension, the World Bank and Bank of International Settlements have called for more global investment and warned that attacks on free trade make everyone worse off 

What to Watch:

Attunedly,

The Polly Portfolio Team