“Storm In The US …..”

Storm In The US

A massive storm is threatening Eastern United States with flooding, snow, ice and high winds.  In view of this, thousands of flights have been cancelled and weather warnings issued.  Schools in New York and Boston are closed.  Natural gas surged to a record while electricity prices reached the highest prices in years.

US – Government Funding

Lawmakers in Washington are in for another battle over the funding for the government as the January 19th deadline approaches.  For the Democrats its is an opportunity to get the president to sign legislation to protect young undocumented immigrants known as “dreamers”  while the president wants an agreement to fund his border wall and an overhall to the immigration system.  On the otherhand for Republicans,  besides the successful legislative tax overhaul,  they are after more legislative victories in order to avoid a wipeout in the mid-term November elections.

US – FED Minutes

The minutes of the Federal Reserve meeting held on Dec 12-13 were released on Wendesday in Washington.  They  show that Federal Reserve Officials in December discussed the risks about the US economic outlook.  Some are concerned about low inflation, whilst others pointing out to robust growth that was about to get a further boost from tax cuts.   The minutes further showed that policy makers continued to wrestle over the outlook for inflation.  Economists were rather surprised in 2017 as wages and prices failed to rally despite the stengthening of the job market.  Although unemployment dropped to 4.1 percent, the Fed’s preferred measure of inflation dipped to as low as 1.4 percent before rebounding to 1.8 percent in the 12 months through November.  Fed officials said the pace of rate hikes could be slower if inflation failed to move up towards the 2 percent target.  According to the minutes, although participants saw the risks to the economic outlook roughly balanced, they agreed that inflation developments should be monitored closely.  The minutes also talk about the yield curve and the so called flatness of the curve (where the spread between short and long term rates narrows).  In this regard,  “several participants thought it would be important to continue to monitor the slope of the yield curve”.   A week after the FOMC meeting, lawmakers passed a tax overhaul, a $1.5 trillion cut in corporate and personal taxes.  Many Fed officials said the minutes expected the tax cuts to provide a lift to consumer spending and “a modest boost to capital spending.” Furthermore the minutes state that  most participants have reiterated support for “continuing a gradual approach to raising the target range” for the benchmark policy rate.  Fed officials have discussed several risks that could result in a faster pace of increases in particular, “that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level”, arising from fiscal stimulus or accomodative financial conditions.

Manufacturing Boom

The IHS Markit monthly factory index for the euro area climbed to a record 60.6 in December as manufacturing was boosted by global demand.    For the UK a similar gauge dropped to 56.3 for the month which is still above the 50 mark indicating an expansion.  With regards to the US  the December’s manufacturing PMI will be issued in due course.

IRAN

Protests in Iran which started on December 28th over economic conditions have left more than a dozen people dead.  Authorities have accused Saudi Arabia, which is the country’s main regional rival of pursuing a social campaign to take advantage of the unrest.  According to Donald Trump “Iran is failing at every level”.  He also criticized the Obama Administration’s nuclear deal with the country.  The protest seem to lack organisational leadership which might imply that it does not pose a threat to the regime in Tehran.

North Korea and South Korea

North Korea used a hotline with South Korea for the first time in two years after Kim Jong Un called for improved relations on the peninsula in his New Year’s Day address.   As President Trump remains skeptical on the prospect of easing tensions, in a posting on twitter he reminded the North Korean Leader that he too has a nuclear button on his desk and his is bigger.  Meanwhile, North Korea accepted a proposal to hold talks with South Korea on Tuesday, reducing tensions as the government of President Moon Jae-in of South Korea prepared to host the Winter Olympics next month.  Trump on Thursday called the potential talks as a “good thing” and agreed with South Korea there would be no joint military drills, which North Korea opposes during the Winter Olympics to be held next month.   Trump and Moon agreed “to de-conflict the Olympics and our military exercises” to ensure the security of the games and that a high level delegation would be attending. The two leaders have also “agreed to continue the campaign of maximum pressure against North Korea”.

MIFID

It was a smooth start for the biggest regulatory change in Europe in 10 years.   According to the chairman of the European Securities and Markets Authority there were no teething problems.  It involved seven years of preparation and $2 billion in compliance costs.  The finance industry embraced one of the regulatory shifts in history affecting everything from research to dark pools.  Regulators gave grace periods to companies in order to ease the burden on some of the biggest issues as banks and asset managers struggled to comply on time.  Trading volumes were below average even though the first week of the year tend to be quiet anyway.   The rules present banks with opportunities to grow businesses offering passive investing, reasearch and direct trading with clients, but it could also leave them facing competition from research boutiques and platforms that offer low-cost trade execution.   Under the MIFID II asset managers must stop receiving analysis they haven’t purchased.  Unbundling research has sent pricing for analysis plunging and some providers are still cutting the cost of their offering.  Not all the 28 European Union members have transposed the rules into their national legislation or regulation.  The EU commissioner in charge of financial-services policy, Valdis Dombrovskis, has said that markets could face disruptions caused by the late transposition.

Commodity Rally

The bloomberg commodity Index is set for a 15th consecutive day of gains as metals and oils climbed higher supported by disruptions in supply, a weaker dollar and the bullish outlook on global growth.  Copper gained 1.5 percent in London trading as positive US and Euro-area factory data added momentum to the prospects of global growth.

Oil

On Friday a barrel of West Texas Intermediate for February delivery closed at $60.42 for a 12 percent gain in 2017.  Unrest in Iran and stagnant US production are raising the price of the commodity.  Russia has announced that its oil industry continued its long-term expansion last year, with output increasing to a record despite the deal with OPEC to cut production.  This week oil approached the $62 a barrel for the first time in three years, surpassing a crucial threshold for encouraging new shale drilling.

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