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:

Donald Trump may already have made bond traders great again. They have certainly had a busy few weeks as global yields have move dramatically in response to his economic plans. Markets are now referring to the “Trumpflation trade” of buying equities and selling fixed income based on the expectation of fiscal stimulus causing growth and protectionism causing inflation. Economists have started to express cautious optimism about the plan, and markets have started equilibrating to what some are calling a new regime. In particular, valuations now reflect lower corporate taxes and resurgent on-shoring of production. Janet Yellen’s testimony to Congress also fueled the sell-off as momentum had been waning: her comments on imminent Fed rate hikes, her confidence in the economy, and her intentions to serve out her term into 2018 pushed the dollar to highs not seen since 2003. Most other economic data points also suggested a robust economy: steady industrial output, strong retail sales, and solid municipal borrowing for infrastructure investment.

Outside the U.S., global rates sold off as well, though the selloff largely does not seem to reflect underlying economic strength. The rout started early in the week but lost some momentum by Thursday. Ray Dalio has argued that the rise in yields reflects greater global risk as globalization retreats, though he downplays the “craziness factor” of someone like President-Elect Trump. In Europe, Germany reported weak growth, and in a reflection of the dour outlook, the European central bank reaffirmed its open-mindedness to more stimulus. The United Kingdom looks likely to face a 100 billion pound cost for Brexit as Europe outlines a hard stance and as the current government cannot agree on a plan for exit. China also has seen a substantial weakening of the yuan, and the Chinese central bank has had to sell Treasuries over the past week to stabilize the currency. In perhaps the only bright spot outside the U.S., Japan reported solid growth, and the Bank of Japan doubled down on its monetary strategy by offering to buy unlimited quantities of Japanese government debt.

 

What to Watch:

Lightly and Verily,

The Polly Portfolio Team