Monthly Market Report - December 2016

23rd November 2016

With commentary from David Stevenson

Thank goodness the US election is over at last. Now we can all collectively get back to rather more boring issues such as whether we’re one step away from a recession in the US (probably – see later), if inflation is about to make a comeback and whether oil prices might slip below $40 a barrel. All of these issues will challenge the new President’s inbox, forcing him to adapt policies to messy circumstance. But for me the really big financial tectonic plate shift has been around bonds. We’ve all been collectively waiting for a bond switch – maybe even a bonds rout – and none has been forthcoming so far. Deflation has continued to be the pesky troublemaker, keeping inflation rates low and bond prices high. But Trump’s win has caused jitters. Bonds have sold off and yields have risen. There’s clearly going to be even more bond issuance on its way and there’s also the possibility that inflation might rise as global trade becomes challenged. All of these factors could prompt investors to worry about a triple whammy: a massive increase in issuance, rising inflation and a buyers strike from China. If buyers do start to head for the hills, we could see bond yields rise sharply just as interest rates start their slow climb in the US. On paper this could all be great news for equities, with massive inflows into dividend yielding equities. But the problem is that over the last few years’ correlations between assets have tightened and if there is a big bonds sell off, equities might be dragged down as well.

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