The policy of the new US President
The first month of 2017 was rich in important events. The main topics during this period were the coming to power of the new administration of the United States, the situation on the commodity and stock markets, as well as the results of meetings of world Central banks.
In addition, the focus was on Britain due to uncertainty about the country's future ties with the European Union. The result of January was a moderate increase in gold prices, a correction in oil, a widespread weakening of the dollar, and a strong growth in US stock indexes.
Returning to Central Banks, it should be emphasized that only three meetings were held this month, namely the Bank of Canada, the European Central Bank (ECB), and the Bank of Japan.
As expected, the Bank of Canada decided to leave its interest rate at 0.5%, citing uncertainty about the fiscal and trade policies of the new US administration and its implications for Canada. In addition, the Bank of Canada has revised its forecasts - the economy is currently expected to expand by 1.3% in 2016 (previously forecast growth of 1.1%). The Bank also slightly raised its forecast for this year, to 2.1%, and confirmed its forecast for 2018 at 2.1%. Meanwhile, the head of the Bank of Canada Poloz said that the probability of a rate cut remains if there are downside risks.
As for the exchange rate of the canadian dollar, since the beginning of January, the USD/CAD pair has fallen by about 2.5%.
After the ECB meeting, the results of which coincided with the forecasts of experts. The ECB kept all its rates unchanged, and confirmed that the volume of the asset repurchase program until the end of March 2017 will be 80 billion euros per month, and from April to December 2017 will decrease to 60 billion euros. euro per month. The ECB also said that if necessary, it can increase the volume of the asset repurchase program or its duration. However, ECB President Mario Draghi confirmed that monetary policy will remain extremely soft. Draghi said overall inflation in the next six months is likely to grow at a faster pace than management expected due to higher oil prices. Draghi also said that the Central Bank did not discuss the issue of curtailing the stimulus, although he admitted that it will happen sometime. The results of the latest Reuters survey showed that 11 out of 17 traders believe that the next step of the ECB, after the planned reduction in QE in April, will be to further reduce the quantitative easing program. 4 traders said that the ECB will once again increase its monthly asset purchases, and 2 traders said that the next step of the ECB is likely to be a rate hike. Meanwhile, none of the traders are not predicting a further decline in interest rates. If we talk about the situation on the foreign exchange market, at the end of the month, the EUR/USD pair increased by almost 1.7%.
The meeting of the Bank of Japan also did not present any surprises. The Central Bank's management decided to maintain the current pace of government bond purchases (about 80 trillion yen). and at the same time, it left the short-term interest rate at -0.1 percent, and the target yield of 10-year government bonds near zero. At the same time, the Central Bank raised a number of forecasts for GDP for the coming years in the expectation that the stimulus measures under trump will strengthen the expansion of the US economy and spur the growth of Japanese exports against the backdrop of a weakening yen. In the 2016 (current) fiscal year, the Central Bank expects GDP growth of 1.4%, not 1%, as previously assumed, the estimate for 2017 improved from 1.3% to 1.5%, for 2018 - from 0.9% to 1.1%. Forecasts for inflation in General remained unchanged. As expected, inflation excluding fresh food will reach 2% per annum) in the 2nd half of 2018, Summing up the results of the month on the foreign exchange market, it is worth noting that the USD/JPY pair fell by 2.8%.
An important topic in the markets was also the dynamics of the oil market. Since the beginning of the month, WTI crude prices have fallen by 2.4%, while Brent crude has fallen by about 2.8%. The reason for this dynamic was investors ' attempts to assess the impact on the market of two factors-the growth of oil production in the United States and signs of compliance with production quotas under the OPEC agreement. Some analysts remain skeptical about whether OPEC's production cuts will materialize completely, given past non-compliance with established quotas. Meanwhile, the recovery in oil prices leads to increased drilling activity of shale oil producers in the United States, which in turn reduces the prospects for reducing the oil surplus. After the recent rise in oil prices to $50 - $60 per barrel, us production has begun to show signs of recovery. The latest report from the us Department of energy showed that commercial oil reserves increased by 2.8 million to 488.3 million barrels, and production increased by 17 thousand to 8.961 million barrels per day. However, Baker Hughes reported that for the week ending January 27, the number of active drilling rigs in the United States reached the highest since November 2015. The total number of installations increased by 18, to 712 units, the number of gas installations increased by 3, to 145 units, while the number of oil installations increased by 15, to 566 units.
The world Bank expects that in 2017, the average price of oil will be at the level of $ 55 per barrel. Compared to the previous October issue, the forecast remained unchanged. At the same time, the international monetary Fund raised its forecast for the average oil price for 2017 by $0.6 to $51.2 per barrel. In 2018, the Fund expects an average oil price of $53.
As for the situation on the gold market, in January, the price increase resumed, which helped to compensate for the decline recorded in December. Since the beginning of the month, gold has risen by 4.6%, helped by increased physical demand and some investor doubts that the trump administration will be able to successfully implement its plans. In addition, prices were supported by an increase in demand for safe assets due to the us President's immigration policy. Last Friday, trump signed an Executive order that bans citizens of seven countries (Iran, Iraq, Yemen, Libya, Syria, Somalia and Sudan) from entering the United States for 90 days, as well as suspends the admission of any refugees for 120 days and prohibits indefinitely the admission of refugees from Syria. This decree worried investors, who fear that the unpredictability of trump's policy may increase. However, gold continued to be under pressure from the significant strengthening of the dollar after the US election and expectations of a fed rate hike this year. Gold prices also reacted to the dynamics of US bonds. Bond yields rose strongly after the election, as expectations of faster economic growth and inflation increased the likelihood of a rate hike. This has put pressure on gold, which does not generate interest income. In the long term, the main driver of gold prices will be the dynamics of interest rates and the dollar.
A significant event in January was the growth of the us stock index Dow Jones above the mark of 20 thousand points. The S&P and Nasdaq indexes also updated their historical highs. The increase in the indices was due to the good financial statements of companies, and the us President's plans to boost economic growth. Last week, trump said that his administration intends to reduce measures to regulate business in the country by 75% or more. At the same time, he assured that the authorities will pay attention to environmental issues and the safety of workers when implementing such regulation. He also promised that the US will impose high taxes on companies that take production abroad. In addition, trump signed two Executive orders to speed up the construction of the Keystone XL and Dakota Access oil pipelines, which were opposed by his predecessor, Barack Obama. Before that, trump initiated the us withdrawal from participation in the TRANS-Pacific partnership and announced his intention to renegotiate the terms of the North American free trade area (NAFTA) agreement with the leaders of Canada and Mexico. Meanwhile, investors are still concerned about trump's protectionist position in connection with the signing of Executive orders on immigration, according to one of which border security is being strengthened and a wall should be built on the border with Mexico. In the future, investors will listen to any statements made by trump regarding tax reform, spending on infrastructure projects and deregulation of the economy. Its domestic economic policy will also be of interest. Most likely, some skepticism about the trump presidency will continue until market participants see a clear picture about the us President's plans for taxes and economic stimulus. While reports from some companies pointed to improved corporate earnings and continued growth in the US, a strong rally in the stock market still makes analysts and investors cautious. To a large extent, this growth was caused by hopes about trump's measures, which may not be implemented or have the expected effect.
The market's focus in January was also on the UK, namely more detailed plans for the country's exit process from the EU. During her speech, British Prime Minister Theresa may clarified her approach to the future economic relations between Britain and the European Union, saying that her country intends to leave the EU single market. May said she would not try to maintain access to the single market, instead seeking to conclude an "ambitious" free trade agreement. It should be emphasized that the loss of access to the single market will create uncertainty for British companies that depend on trade with Europe, but it will allow the UK not to obey the principle of free movement of people and capital, thanks to which any EU citizen can live and work in the UK. In addition, may said that she plans to start formal negotiations on the country's exit from the EU in March, which will allow the process to be completed by March 2019. However, due to the latest Supreme court decision, the launch of the Brexit process may be delayed. Recall that the Supreme court ruled that may can not initiate the Brexit process without the approval of Parliament. This decision was made by a majority vote (8 against 3). The government soon said it respected the court's decision and would take further steps in Parliament. At the same time, may made it clear that the verdict of the court will not affect her plans, and said that she expects the support of lawmakers. However, parliamentarians may complicate this process by adding amendments regarding the future relationship of Britain with the EU. Meanwhile, analysts believe that the requirement to get approval in Parliament will not be able to delay the Brexit process for a long time. If we talk about the situation on the foreign exchange market, in January, the GBP/USD pair increased by about 1.2%.
In February, market participants will continue to monitor the monetary policy of the main Central Bank. The results of the fed meeting will be announced on February 1. According to the futures market, now the probability of the fed raising the interest rate at the February meeting is only 4%. Recently, fed chair Janet Yellen spoke in support of a smooth and gradual increase in interest rates, while emphasizing that the fed is successfully coping with limiting inflationary pressure, but can not allow the us economy to overheat.
At the same time, on February 2, the Bank of England will hold a meeting, during which an updated report on inflation will be presented. The latest survey conducted by Reuters found that the Bank of England will keep its interest rate at a record low of 0.25 percent until at least 2019, despite the fact that it is likely to again revise up its forecasts for economic growth for 2017 during the February meeting.
In addition, investors will wait for clarification of us President trump's plans for taxes and economic stimulus. In General, February will be a very important month for the market.