INTERVIEW BRIEFING

14.11.16 ISSUE 96

W H AT Y O U N E E D T O K N O W R I G H T N O W !

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The information, news and data provided below highlight the key macro economic and corporate events currently affecting
global markets. You should ensure that you are familiar with these issues in order to demonstrate your market knowledge
and interest.

MACRO ECONOMIC NEWS

SHOCK TRUMP VICTORY LEADS TO HUGE SELL-OFF IN US GOVERNMENT BONDS AND RALLY IN EQUITIES AS INVESTORS TRY TO ASSESS THE
CONSEQUENCES OF THE NEW PRESIDENT
2016 has become the year of shocks, first we had the surprise vote by the UK to leave the EU and now we have Donald Trump as the next
president of the USA, confounding all the polls.
News that Hillary Clinton was not to face a criminal enquiry by the FBI led investors to believe that she was certain to become the first female
president, in the days running up to the election last Tuesday equity markets rallied and the bond market was stable with the focus shifting
back to Federal Reserve monetary policy.
However everything changed when it became clear that Trump had secured a stunning victory, just the night before you could have got 10-1
against a Republican president but around 4am (UK time) it became clear that he was going to secure more than the 270 electoral votes needed
to win.
The markets initial reaction was what you would expect, a sharp sell off in US stock market futures and the US dollar as well as huge demand for
safe haven assets such as 'risk free' government debt and the Japanese yen.
The Far East markets were the first to open on Wednesday, the Nikkei index in Japan fell 5% and closed down over 4%, this set the initial tone in
Europe with heavy losses on all equity market futures but by the time equity indices opened a rally had already taken hold, most European
markets open down around 2%, bad, but by no means a disaster, certainly in line with 'normal' market activity.
The trigger for the rally was Trump's victory speech which struck a much more conciliatory tone than anybody expected which restored some
confidence that his victory may not be as bad for markets as many had predicted.
Once the dust had settled investors focused on what a Trump presidency would actually mean for the US and global economy, the conclusion
was that it would be broadly 'reflationary', that is he would embark on a economic stimulus policy of huge infrastructure spending and
significant tax cuts.
Q: How large is the Trump administrations stimulus package expected to be?
A: Trump reaffirmed his campaign pledge to spend $1 trillion in increased spending and to cut the rate of corporation tax by as much as 20%.
Q: What is the current rate of corporation tax in the US?
Q: Presently the corporate tax rate in the US stands at 35%.
The powerful rebound in equities saw the Dow Industrial Average reach an all time high on Thursday before retreating slightly towards the end
of the week, the more broad based S&P500 traded close to its peak.
After the initial 'flight to safety' of US treasury buying we saw a complete reversal with yields spiking to finish the weak sharply higher,
remember bond yields move inversely to bond prices.
Q: Why did investors sell US debt so aggressively given its safety and relatively attractive yield (certainly versus its European peers)?
A: I think there were two reasons for the move, firstly if Trump is to go ahead with the $1 trillion of spending and tax cuts he will have to
raise money, clearly the bond market is the most obvious place to raise this cash, as with any supply/demand based market, increased supply
usually leads to lower prices. Secondly many analysts believe that these policies will lead to higher inflation rather than growth. Higher
inflation erodes returns from bonds making them less attractive to investors.
The US 10 year bond yield moved very dramatically, prior to Trumps victory it stood at 1.8%, at the end of last week it had hit a recent high of
2.15%, 35 basis points in bond yield term is very significant.
The more policy sensitive 2 year bond yield moved 12 basis points higher to 0.92%.
A credible explanation for the moves in US bonds is the continued belief that the Federal Reserve will move interest rates higher next month.
The fed fund futures market is pricing the chances of a 25 basis point rise in December at over 80%.
Initially investors felt that a Trump win may delay action from the Fed but on reflection investors took the view that Trump's policies are likely
to increase inflation, further strengthening the case for an increase.
Q: China is a very large investor in US debt, how much does it own and what is Trumps rhetoric towards the country?
A: Trump has made his views on China widely know, suggesting that one of his policies could be to apply a tariff to Chinese imports,
potentially souring relations with the country. China is a huge investor in the US, the country owns over $1.24 trillion of US treasury bills
which represents over 30% of the $4 trillion in issue. China also owns 10% of all publicly listed US debt. If China ever decided to sell down its
ownership of US debt it could have very significant consequences for the cost of borrowing in America.
The US dollar proved to be one of the major winners after an initial fall, the DXY index moved from 96 to 99 in the two days after the election.
The dollar gained ground against the euro but the most dramatic move was against the Mexican peso, at one stage the peso was down 13% vs.
the USD before finishing the day down 8.5%.
There is widely held view that the Mexican economy could be pushed into recession if Trump follows through with his threats to renegotiate
NAFTA and restrict trade between its two neighbours, Mexico and Canada.
Q: What is NAFTA and why does Trump want to amend its terms?
A: NAFTA stand for North American Free Trade Agreement, it came into force in 1994 and effectively eliminated trade tariffs between the US,
Mexico and Canada. Trump has stated many times that NAFTA is 'the worst trade deal in history' and wants it amended to favour the US
more.

W H AT Y O U N E E D T O K N O W R I G H T N O W !

Sterling was a notable exception, rallying against the euro and US dollar, since Britain's vote to leave the EU the UK pound has been under huge
selling pressure, trading below $1.2, last week it reached $1.26, its highest level against the dollar since the Brexit vote (see below for more
details)
Industrial metals had a very volatile week with copper reaching fresh highs, other metals followed suit, though not to the same degree, before
retracing much of the gain towards the end of last week.
The move in metal prices was predicated on the belief that the new president's infrastructure spending will increase demand for industrial
metals such as copper, there has also been steady buying by Chinese investors as well as speculators.
The move was tempered by the strength of the US dollar, which makes commodities more expensive in local currency terms.
Gold was one of the biggest losers last week, falling 5.4% as investors sold the yellow metal.
Directly after Trump's win gold was in demand for its safe haven characteristics however it soon lost its shine as speculators rounded on the
prospect of higher inflation, usually seen as bad news for gold, favouring higher risk assets such as equities.
The US earning season has almost finished, it was slightly better than usual with 71% of companies beating estimates compared to an average
of 67%, although as we mentioned in our last email the slightly worrying trend of weak guidance continued.
The European season is just over half way though and the picture is more mixed.
Another casualty of the dollar strength was oil, Brent crude, the international benchmark fell 2.3% last week to finish at its lowest level for
several weeks.
As we mentioned after an initial sell-off most equity markets finished last week up, the S&P500 index has rallied 1,5% since the election result,
most major European indices were up a similar amount, one major exception was the FTSE 100 which retreated 2% last week, falling 1.5% on
Friday.

HIGH COURT VICTORY FOR ANTI-BREXIT CAMPAIGNER AND US TRADE OPTIMISM FUEL STERLING RALLY
Somewhat overshadowed by events in America there was a dramatic victory in the high court for Gina Miller who challenged the governments
right to trigger Article 50 without a House of Commons vote.
The court decision will be challenged next month, however if this appeal is unsuccessful the government will have to vote to allow PM Theresa
May to start the process of the UK leaving the EU, raising the possibility of Britain remaining in the EU if Parliament doesnt vote in favour.
This uncertainty led to significant 'bear closing' in the British pound.
Sterling has been one of the most shorted currencies on markets as investors and speculators bet that the uncertainty around Brexit would
create further weakness.
The pound has been hovering around the $1.2 level for a couple of weeks, at the end of last week it stood at $1.26, its highest level since the
Brexit vote.
Whilst most observers don't really believe that the vote to leave will be overturned it was enough for a significant rally, there are few potential
outcomes, firstly that the government wins the appeal process, enabling PM May to evoke Article 50 in March 2017, secondly they lose and ask
the Commons to vote, lastly it could lead to a general election.
Theresa May could call on election on a Brexit mandate, most believe that an election would see a Conservative victory with an increased
majority, however recent events have certainly taught us to expect the unexpected so there may be some reluctance to call a general election!
Q: Has the high court decision changed the timetable for Brexit?
A: Potentially, clearly if the appeal is successful then the timetable should remain intact with Article 50 invoked in March, if however,
Theresa May does call an election to give her the mandate it could move the entire process back, giving the government more time to
prepare for Brexit. It is also worth noting that there are some key European elections next year, including both France and Germany. Trumps
victory has led some to speculate that the far-right party of Marine Le Pen in France could do well in next years election. Matteo Renzi, the
Italian PM is also struggling in his attempt at reforming the constitution, most polls show that if the vote was held today he would lose
resoundingly, the referendum will be held on 4th December. Its clear there could be challenges to the EU from other countries within the
bloc.
Another reason for the strength in Sterling was a bit more opaque, there is a growing belief that the new US president would look favourably
on the UK in future trade negotiations, boosting the British economy.
Trump appears to be opposed to regional trade deals, like NAFTA, preferring single country deals, however senior EU officials have publicly
stated that any deal between the US and UK would not happen.
It was largely due to the relative strength of sterling that FTSE100 underperformed its European peers last week.
It will be interesting to see how markets react in the coming weeks as investors grapple with the implications of Donald Trumps victory, many
institutions are sitting on high levels of cash, the challenge they face is where and when to put that cash to work.
One of the main themes of last weeks moves was asset and sector rotation with investors trying to pick winners and losers.

CORPORATE NEWS
CHINESE CONSUMERS BREAK RECORDS WITH HUGE 'SINGLES DAY' SALES FOR ALIBABA
Jack Ma, CEO of Alibaba, the Chinese e-commerce giant was the architect of 'singles day', the worlds biggest shopping event.
This year was even bigger with sales of over $1billion in the first 5 minutes and $18billion on the day, far out-stripping Thanksgiving and Black
Friday which has sales of around $3.5billion.
The day started with a star-studded line up including Scarlett Johansson and David Beckham, Ma's intention is to make shopping
entertainment.
During the show audiences participated in games by shaking, scanning and tapping phones more than 6.8 billion times, Alibaba said.
The best selling lines were trainers, masks and lipstick, over 82% of purchases were made on mobile devises.
The event is huge with 6 million products from 30,000 brands sold by 40,000 merchants.
Sales this year were up 32% on last year, Mr Ma declared that the shopping festival would continue for another 92 years.
We have, in the past, talked about a Chinese slowdown, its hard not to think these fears have been overdone, certainly events like this prove
that the Chinese consumer is very much alive, recent economic data from China has been showing an improving trend.

W H AT Y O U N E E D T O K N O W R I G H T N O W !

RELATIVELY STABLE EQUITY MARKETS MASK SOME DRAMATIC SECTOR MOVES

On the face of it last week was not that dramatic for equites, as we mentioned above.
Europe and US markets were up and the UK was small down, however that doesnt tell the whole story as within these indices there were
some very large rotation trades.
Both US presidential candidates policies were seen as favouring certain sectors over others, Hillary Clinton was seen as bad news for the banks
as she is seen as a believer in tighter regulation, another sector that was expected to suffer under a Clinton administration was the
pharmaceuticals where Clinton has been very outspoken about the price of drugs.
I have attached a chart below that shows the performance of key sectors since Trumps win, it clearly shows the winners and losers.

Source - Bloomberg

As you can see from this chart the biggest winner has been small cap stocks, these companies are typically very domestically orientated so are
most likely to benefit from infrastructure spending.
Financial stocks have also been strong, for mostly two reasons, firstly Trump is know to favour less rather than more regulation on banks, he
did say that he would repeal the Dodd Frank act, part of which is the Volker rule which prohibits US banks and their subsidiaries from taking
proprietary risk.
Secondly the recent rise in bond yields and expectations of higher inflation should help the banks business model by improving interest
margin.
The third sector to outperform the broader S&P is industrials, for obvious reasons they should be the companies that will gain from contracts
to update infrastructure.
The two main laggards are staples and utilities.
Utility company shares usually benefit from a low interest rate environment as they offer an attractive yield, usually without much growth, not
exciting but very solid, there is now an expectation that rates will rise along with inflation reducing some of the attractions of the sector.
Staples have been strong but if we are entering a period of higher inflation investors will look for more exciting places to put their money.
These moves have largely been replicated in Europe.
Another gainer has been healthcare due to lighter regulation, although Trump did downplay his vehement opposition to 'Obamacare'.

MARKS AND SPENCER STOCK FALLS HEAVILY AS IT UNVEILS HALF YEAR RESULTS AND STORE CLOSURES
The UK food and clothes retailer Marks and Spencer announced earnings for the six months to 1st October showing further evidence of how
tough things are on the high street.
The company announced a fall of 18.6% in pre-tax profits to 231m from 284m.
The company also announced that it is to close 30 stores and scale down another 45 in the next 5 years, they will also exit 10 unprofitable
overseas markets.
Much of the reason for the poor results was blamed on the struggling clothing arm.
Marks stock fell from 3.55 to touch 3.15 before rebounding to 3.26 on Friday.
The Sunday Times ran an article that quoted Steve Rowe, the incoming CEO, as saying that 'M&S grocery prices were more likely to fall than
rise' despite the fall in sterling.
The company said that it planned to mitigate the pain through 'optimisation of our supply chain' and by selling greater volumes.
About 20% of M&S's food lines come from US dollar and euro areas.
Some suppliers to the large supermarkets have said that increased costs due the depreciation of sterling have pushed them into the red,
however some observers have accused suppliers of 'Brexit profiteering.
You cannot avoid the fact that sterling's weakness will put upward pressure on prices, this week we will see the publication of UK inflation data
that is expected to show that inflation rose above 1% for the first time in 2 years.
Other suppliers such as Unilever and Birds Eye have recently attempted to raise prices with only limited success.

W H AT Y O U N E E D T O K N O W R I G H T N O W !

INTERVIEW QUESTION:

WILL EMERGING MARKETS BE THE BIGGEST CASUALTY OF THE TRUMP VICTORY?

ANSWER: Since Wednesdays Trump victory emerging markets (EM) have been hit
hard, the largest Exchange Traded Fund (ETF) that tracks EM fell 2.6% on the
same day and Vanguards FTSE EM ETF fell another 2.9% on Thursday, all as the
S&P500 and some European indices rallied.
There are several reasons for the steep falls, one is as simple as the EM sector
has been a good performer this year, Vanguards FTSE EM fund was up 19% up
until September, so a bout of profit taking is not unexpected, another, more
important explanation is the strength of the US dollar, any EM investor that
counts its profits in US dollars will clearly lose as the local currencies fall.
As EM currencies fall against the US dollar the local central banks come under
pressure to increase interest rates to protect their currency.
Some EM countries have borrowed money in US dollars so as the dollar rises so
does the debt value in local currency terms, making it harder to finance.
One of the key factors around the EM weakness is Trumps rhetoric, Mexico in
particular has benefited from easy trade with the US, its biggest trading partner,
any sniff of tougher controls or even a trade war would be very bad news for the
Mexican economy.
So will this recent weakness continue?
We are still grappling with the implications of Trumps election victory and it is
far from clear yet what will happen in the coming months, will Trump be able to
follow through with his plans?
Several Republican politicians favour free trade with Mexico and other countries,
potentially blocking the president.
EM stocks have been in demand because on a price relative to earnings basis
they are some of the cheapest in the world, their recent decline as made them
even cheaper.
One EM investor said that 'markets often discount things too much and too
quickly and to the Nth degree, where in fact in reality it is somewhere inbetween'.
We have leant this year that things are rarely what they might seem initially, it is
probably too soon to call the end of the EM rally, time will tell!

W H AT Y O U N E E D T O K N O W R I G H T N O W !

EUROPEAN MARKETS (14/11)

Price

14 day change

FTSE:

6730

-3.2%

7122

DAX:
CAC:
US MARKETS
S&P 500:

10667
4489

unch
-0.4%

12390
5283

2164

1.69%

2185

NASDAQ:
COMMODITIES
BRENT:

5237

0.8%

5231

$44.75

-8.5%

$119

$1224

-4%

$1796

GOLD:
BOND YIELDS (10yr)
US TREASURIES:

52-wk High

2.15%

GERMAN BUND:
UK GILTS:
SPANISH:
CURRENCIES
GBP/USD:

0.3%
1.364%
1.474%
1.262

EUR/USD:
JPY/USD:

1.085
106.06

VIX Index 14.1

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