Last week, President Donald Trump announced a plan to set imposed tariffs on steel and aluminum imports further adding a layer of uncertainty on the future outlook of the markets. Tariffs of 25% on steel imports and 10% on aluminum imports will result in a price increase for multiple consumers and slow down growth for many businesses globally. This news could also play a major impact on foreign countries as they might also impose a similar tariff on U.S. exports.
President Trump’s announcement resulted in a decline in the stock market and backlash from global leaders who might have to face the burden on billions of dollars’ worth of U.S. imports. Shares of industrial companies and automakers face heavy headwinds with a sharp decline in share price going forward. The U.S. dollar continued to pull-back against the yen and euro as rumors about a potential trade war created a volatile environment according to Brad Sorensen, managing director of the Schwab Center for Financial Research.
“The market doesn’t like uncertainty. We don’t know if the tariffs will be targeted or widespread, what the foreign reaction will be, or whether this is an opening shot in a battle for tighter trade restrictions or a standalone action designed to send a message in ongoing trade negotiations.”
The biggest question has still been left unanswered because there is no concrete direction the market is headed due to the Cboe Volatility Index (VIX), a measure of market volatility expectations. With the recent news on tariffs and the Fed’s potential short-term rate hikes, the VIX has sparked to a level around 19.59 further implying a 30-point swing in either direction for the S&P 500.
As potential tariffs could impact the job market and change investment strategies going forward; only time will tell if tensions rise between the United States and its foreign trade partners.
BlackRock is stepping up their intelligence research. The hedge fund is setting up a new center dedicated to research in artificial intelligence, placing an emphasis on interest among asset managers in how machine learning can revolutionize the investment industry. The world’s biggest investment group, with $6.3tn of assets under management, is establishing a lab for AI research in Palo Alto, California.
“Research in AI can enhance current investment strategies and accelerate efforts to bring the benefits of these technologies to the entirety of the investment industry” said Keith Knutsson of Integrale Advisors.”
AI has emerged as a topic of interest in the corporate world. Furthermore, the power of modern computers and expanding digital data have allowed for natural language processing and machine learning. Asset management teams are especially interested in enhancing AI as they try to improve the performance of their fund managers, automate back-office functions, and enhance their client outreach by analyzing large amounts of data. Some researchers believe that AI could ultimately replace human fund managers completely.
BlackRock seeks to be on the cutting edge of technology in the world of finance and the setting up of the AI lab, and an internal “Data Science Core” unit announced is part of the company’s technological advancement plan. Included in this plan is the use of investing machines to analyze traffic through corporate websites as an indicator to the future growth of a company. Another technology that the firm uses is text analysis to filter through transcripts of earnings calls, looking for signs of whether a management team is positive or negative about their company’s prospects.
Analyzing large amounts of data with ease opens a world of possibilities for generating alpha. However, traditional techniques must continue to be improved if a firm is to outperform their competitors. The new lab represents a deepening of those efforts to enhance AI in the financial field.
The United State Commerce Department posted GDP numbers at 2.6% on January 26th for Q4 2017. Those numbers missed Wall Street expectations of 3% but remain much better than the average 2% growth since the early 2000s, and the 1.5% increase in 2016. The United States has not been able exceed the 3% mark for three quarters in a row for 13 years now, during the George W. Bush presidency. The growth was attributed due to increases in personal consumption expenditures, nonresidential and residential fixed investment, exports, and government spending on the local, state, and federal level. Limiting factors included reduced inventories and an increasing trade deficit; imports and exports rose 13.9% and 6.9% respectively, with rising oil prices having a profound impact on the import numbers.
Consumers and businesses powered the economy to a 2.6% rate of gross domestic product growth in the final three months of 2017. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3% mark for the third quarter in a row for the first time in 13 years. Meanwhile, the Federal Reserve projects 2.5% growth for 2018, and other economists expect short-term growth of 3%. Factors such as an aging population and meager productivity growth remain key factors to subdue additional GDP growth.
Inflation rose 2.8% in the Q4, marking the highest quarterly increase since 2011. While 2.8% is above the 2% goal of the Federal Reserve, the year to year number was under 2%. Investors remain curious whether this development will draw comments from the Federal Reserve.
Equities have experienced strong quarterly results as well. Over 70% of S&P 500 companies beat EPS expectations in Q4, with an earnings growth rate of 12.3%.
Keith Knutsson of Integrale Advisors commented, “consumer confidence, according to the OECD, is at the fourth highest level since the 70s, the unemployment rate is incredibly low considering structural and frictional unemployment, and capital investments carry momentum with the new tax plan – the U.S is looking forward with much strength.”
In 2017, Germany’s economy grew at the fastest annual pace in nearly a decade. As a result, this is a large contribution to the pickup in growth across the eurozone.
According to the German National Statistics Office, GDP (gross domestic product) grew 2.2% last year, after analysts expected growth of 2.3%. Nevertheless, it was the fastest pace of growth recorded since 2011.
Germany’s strong performance feeds into the success of the eurozone. On Tuesday, the World Bank estimated the EU’s economy grew 2.4% in 2017, which would be its strongest performance since 2007. The expectation is that Germany’s positive growth and momentum will continue in the current year. Trade played a big role in the growth: imports grew 5.2%, exports were up 4.7%.
“Looking to the future, the fundamental factors that supported growth in 2016 and 2017, such as rising industrial production and larger demand for real estate, should still be in place in 2018” said Keith Knutsson of Integrale Advisors.
The recent pickup in growth across the eurozone has made policy makers at the European Central Bank more confident that they will reach their inflation target over the next couple of years. The central bank is decreasing monthly bond purchases under the quantitative easing program from €60 billion from €30 billion.
The acceleration in growth has been fueled in part by a rise in business investment, with Germany seeing a 3.5% rise in spending on domestic plant and machinery in 2017. Eurozone industrial production was 1% higher than in October, and 3.2% higher than in November of 2016. As a result, Germany remains the Eurozone’s manufacturing powerhouse.
London is currently the financial center of Europe. However, with recent Brexit negotiations, this is now under threat. Amidst all this, the Bank of England is aiming to retain its status as one of Europe’s most powerful banks.
In December, the Bank of England said it will give commercial banks and big European investment an easy way to stay in London once Britain quits the European Union. It will offer them the same terms that big U.S. and Swiss banks get. It warned, however, that this setup will require deep cooperation between EU and U.K. regulators.
Brexit will affect the financial industry. The financial sectors is a big source of exports to Europe, representing 90% of Britain’s trade surplus in services with the Eurozone. It also provides more than a 10th of all tax revenue in the U.K.
Currently, London’s role in Europe relies on passporting. This allows any bank in one EU country to sell products and services in any other. That is what lets banks from all over the world use London as a base to serve European investors and companies.
The passporting regime will end with Brexit, and European legislators say it is unlikely to ever be replaced by a free-trade deal for services. The Bank of England’s decision can be seen as a gesture of goodwill. It does nothing to actually ensure that Europe will give banks in London future access to the EU.
If London preserves its financial hub status after Brexit is entirely implemented, this could stir up trouble for later. The U.S. and EU are already moving in a different direction by forcing foreign banks to set up onshore holding companies that require their own funding, capital, regulation.
This leaves Britain potentially at a disadvantage when banks fail. Allowing all big banks to operate as branches means that when financial trouble strikes, the U.K. will have no choice but to rely on the cooperation and forgiveness of overseas regulators.
It wasn’t until recently that hedge funds began paying attention to the market of digital currencies. Rollout of futures trading for cryptos and soaring prices have some large firms considering whether or not it is time to enter the market.
Funds are looking to profit by either buying bitcoin and other cryptocurrencies or by betting against them. Their entry and acceptance could provide more fuel to bitcoin’s already volatile trading. Quantbot Technologies Fund, Schonfeld Strategic Advisors , and others say they are working to understand how they might be able to profit from bitcoin.
“The market has gotten more interesting and the barrier of entry has fallen. Especially now that bitcoin futures are available” said Keith Knutsson of Integrale Advisors.
Some large firms and investors are already investing in bitcoin. Horizon Kinetics LLC, a firm that manages over $6 billion in hedge funds, mutual funds, and other products has been rather vocal about its recent purchases of bitcoin and other cryptocurrencies. One of the main reason for the exposure is the firm views the equity market as expensive, and the possible upside sizable for bitcoin as “enormous”.
Already, there are around 20 funds, managing a total of roughly $2 billion in assets, that predominantly trade cryptocurrencies. Some hedge-fund managers are becoming more willing to accept the risk of bitcoin after facing losses in traditional investing. The introduction of bitcoin-based futures by CME Group and the Cboe Global Markets Inc. adds to the legitimacy of the currency for some big investors. Cryptocurrencies could be something to look into.
U.S. manufacturing activity slowed modestly for the second straight month in November, but the reading still shows a favorable factory sector. On Friday, the Supply Management Institute said its manufacturing index fell to 58.2 in November, but remained solidly in growth mode. A reading above 50 indicates activity is expanding across the factory sector, while a number below 50 signals contraction.
The slowdown of the sector’s expansion was driven by a decrease in inventories and a slower rate of growth in deliveries from export order and suppliers. Employment growth cooled just slightly. On the other hand, other components of the index showed strength for manufacturing. Overall new orders are rising at faster rate, and production increased.
Recent data shows that the manufacturing sector is on a steady growth path heading into 2018. Furthermore, factories dealing with disruptions due to the impacts of the hurricane season are now back to full production.
According to the U.S. Commerce Department, orders for durable goods are advancing this year at the best pace since 2014. This comes as a result of stronger investment in machinery and equipment by U.S. businesses. The recent recovery in the Energy sector has fueled manufacturing demand as well as demand for capital machinery. The consumer-price index increased 2% from a year earlier in October.
“Currently, demand is prevalent in all sectors. Therefore, the following manufacturing performance should carry forward into the new year” said Keith Knutsson of Integrale Advisors.
The UK’s interest rate hike was viewed as a one-time move despite the statements of the Bank of England. The British pound fell and investors viewed the quarter-point rise as a dovish development. Going forward, will markets be swayed by hawkish talk from the BoE?
Factors that are depressing the possibility of another rate hike include a slowing economy, Brexit uncertainty and retreating inflation. So, despite Ben Broadbent’s stating, ‘We anticipate a couple more rate rises to get inflation back on track,’ markets are seemingly not pricing in more than two rate hikes. While several investors are expecting additional rate hikes to control the 3% year-on-year inflation figure, the high inflation number is mainly caused by a fall in value of the pound. The inflationary impact of a lower pound is transitory and will slowly dissipate in 2018. A better reasoning for more rate hikes should be derived from the tight labor market; the current unemployment rate is at the lowest level since 1975, which will drive future wage growth up.
Keith Knutsson of Integrale Advisors was rather skeptical of such an argument by stating, “while it is very well possible that wage growth picks up looking forward, it has been sluggish despite the shrinking unemployment numbers – real wage growth has actually decreased! What follows is a risk of the economy tilting downside.”
With fears of slowing growth hovering over the Bank of England, it seems unlikely that the rate hikes will occur as presented. An improper approach by the BoE could shift households and businesses towards panic.
Millennials currently represent the largest segment of American homebuyers. Furthermore, there is a shift in the type of community’s millennials are looking to live in. Agrihoods, short for “agricultural neighborhoods” are rising in the U.S., especially among younger generations of home buyers.
The Urban Land Institute defines an “agrihood” as planned housing community with working farms. These neighborhoods have grazing lands, nutrient rich soil, barns, and outdoor community kitchens. In addition, the homes are built to high environmental standards featuring composting and solar energy. Agrihoods are designed to appeal to young, active families who love to eat healthy, enjoy spending time outdoors, and see the value in environmental awareness. According to the Urban Land Institute, there are about 150 agrihoods across the country. Some of these neighborhoods are just minutes outside of large urban hubs like Atlanta, Phoenix, and Fort Collins.
“Agrihoods represent a combination of economic profit, social benefit, and sustainability” said Keith Knutsson of Integrale Advisors.
The development company that coined the term “agrihood” was Rancho Mission Viejo, based in Southern California. The emphasis is on sustainable living, aiming to draw young families as and well as retirees to the communities. All residents of the community have access to communal farms with orchards, workshop space, raised planters, in-ground crops, and fruit trees. However, newer developments in these neighborhoods are not cheap. Homes in these communities typically range from the low $400,000s to over $1 million.
The involvement of the community makes it easy for residents to participate in local programs. In addition, the act of sharing harvest benefits with neighbors brings the community together, thus allowing it and its citizens to thrive.
In concurrence with macro research performed by Integrale Advisors two months ago, emerging markets are struggling. The rand and South African government bonds have endured their worst week since the ousting of its finance minister in March of this year. A combination of economic uneasiness and political tension causes investors to expect another credit-rating downgrade.
The implications of a weak rand include an increasing cost of imports and inflation. The 10-year Yields on the government’s benchmark rose as high as 9.3%, the highest level since June 2016.
The updates from ratings agencies S&P and Moody’s on South Africa’s debt are due in November. In the past year, both ratings agencies downgraded the government’s debt once. A further cut would see the local-currency debt fall into junk territory. This would implicate an expulsion from Citi’s widely-tracked World Government Bond Index.
The South African Reserve Bank continues to struggle against stagnant growth despite high inflation, with this development further amplifying fundamental issues. In August, the central bank employed quantitative easing through rate cuts, but the increasing inflation make it doubtful for such a measure in the future.
Political turmoil exists due to allegations that the renown Gupta family used connections with the president to influence and profit off government business.
Keith Knutsson of Integrale Advisors commented, “forecasts for South African growth exceeded rationality; a cautious eye on the developments hinted at such predicaments for quite some time now.”
The current Minister of Finance, Malusi Gigaba, reduced growth forecasts and issued a warning for higher than previously expected fiscal deficits until 2020.