November 2016 in Focus

“Every once in a while, the market does something so stupid it takes your breath away. There are no sure bets in the world of investing; there is risk in everything. Be prepared for the ups and downs.” – Jim Cramer

A review of November 2016, by Victor Romain – the long read.

November 2016 will, arguably, become one of the most famous periods of modern history, of the 21st century – there has not been a month like it and there is likely to be another [November] month like it ever again. At least that is, having said that, for the next four years – until the next US presidential elections.

On 8th November 2016, Donald J Trump, the conservative, property tycoon and a man without any former political/diplomatic skills became the Republican Party’s nominee 45th president-elect of the United States of America; after a bitterly-fought campaign against the Democrat’s nominee Hillary Clinton.

“I think that you will all agree that we are living in most interesting times. (Hear, hear.) I never remember myself a time in which our history was so full, in which day by day brought us new objects of interest, and, let me say also, new objects for anxiety. (Hear, hear.)” — Joseph Chamberlain, 1898

It was a race to the White House, the likes of which, no one had ever seen before – with accusations (from the Clinton camp) of Russia and The Kremlin being accused of hacking their servers – passing on the information to WikiLeaks and of Trump threatening to appoint a special prosecutor, to investigate Clinton over her deletion of some 33,000 emails – should he win the election. The rhetoric and accusations, flying from both camps, was as ruthless, scandalous and relentless as it was entertaining.

In short…until the final election result was announced – the forex markets had, had more up’s and down’s than that of a Disney Land’s, theme park roller-coaster ride: with many speculators hedging their bets on Hillary Clinton winning the race to the White House.

Indeed, few would dispute we live in interesting and anxious times. Hillary Rodham Clinton made history when she became the first woman presidential nominee of a major US political party.

Despite the euphoria in both the Clinton and Trump camps, there was a great deal of uncertainty about the outcome of the election and what it could mean for the United States and the country’s standing on the world stage.

During the campaign – Hillary Clinton said that, “Letting Donald J. Trump anywhere near the Oval Office would be tantamount to inviting a nuclear apocalypse.” She branded his ideas as “dangerously incoherent,” while presenting herself as a sure-handed, sober-minded alternative to the erratic billionaire. “He is not just unprepared,” she said, “He is temperamentally unfit to hold an office that requires knowledge, stability and immense responsibility.”

Attempting to comprehend the implications of a Trump win was, indeed, a huge challenge for the forex markets, simply because of Trump’s habits of issuing contradictory statements while on the campaign trail, which made it extremely difficult to predict what he would do once in office.

While both Clinton and Trump were cleverly evasive candidates, while on the campaign trail. Clinton held the advantage of having had a known and proven political track-record; due to her tenure in office as Barak Obama’s Secretary of State + her website offered her detailed foreign policy proposals.

Trump, on the other hand, has no foreign policy history and, therefore, offered the public scant details on what would be his foreign policy, should he win. Moreover, he had also alienated himself from most of Republican Party’s, foreign policy grandees. Thus, depriving himself of a pool of expertise, a presidential-elect would normally be able to rely on.

Why should investors take US election cycles so very seriously?

Goldman Sachs suggest that investors should take US election cycles very seriously, because:

• The political stakes in presidential, parliamentary, or legislative elections often translate into changes in policies that can reshape the economic environment.
• The regularity with which elections take place in most countries may give place to cyclical patterns in government and investment behaviour.
• Elections can markedly increase political and social uncertainty. These three factors have the potential to affect all asset classes, especially equities, given their strong sensitivity to changes in the economic outlook.”

(Business Insider, February 2012)

Finally, the authors of the 2008 paper “Financial Astrology”: Mapping the Presidential Election Cycle in U.S. Stock Markets” examined nearly four decades of stock returns and found that “U.S. stock prices closely followed the four-year presidential election cycle. Stock prices generally fell during the first half of a Presidency, reaching a trough in the second year, and rose during the second half of a presidency, reaching a peak in the third or fourth year.” (Social Science Research Network, October 2008).

Is it really so important as to who wins the election?

Bloomberg News wrote that “Stocks Return More with a Democrat in White House” based on the fact that the BGOV Barometer from Bloomberg Government showed that “over the five decades since John F. Kennedy was inaugurated, $1,000 invested in a hypothetical fund tracking the S&P 500 only when Democrats were in the White House would have been worth $10,920” at the close of trading on 21 February 2012 (the day before the article ran). “A $1,000 stake invested in a fund that followed the S&P 500 under Republican presidents, starting with Richard M. Nixon, would have grown to $2,087 on the day that George W. Bush left office.” (Bloomberg News, February 2012).

While Investopedia writes, “The Market and Presidential Promises” is a handy primer on presidential election cycle theory, which was developed by Yale Hirsch (creator of the Stock Trader’s Almanac) and is based on historical observations that the stock market follows, on average, a four-year pattern that corresponds to the four-year election cycle. For another take on how politics can affect the stock market, see “For Higher Stock Returns, Vote Republican or Democrat?” (Investopedia, September 2011 and October 2010, respectively).

The world’s markets rally after [shock] Trump win

Just when most of the financial markets were expecting a Hillary Clinton win for the White House. Along came [initial] rank outsider Donald J Trump and swept away the carpet from beneath her feet – thus becoming the new 45th president-elect of the United States of America on 9th November 2016.

The news of Clinton’s shock defeat and subsequent notice of submission to Trump, initially sent the Asian markets into a downward spiral, because they were the first to open; upon learning of the news. However, shortly after that, the Western markets kicked in and at the close of the day’s trading the markets looked like this:

• The Dow Jones up 1.4% to 18,590 points.
• The S&P 500 up 1.1% to 21,163.
• The Nasdaq up 1.1% • The biggest corporate winners were private prison operators, oil companies and pharmaceutical companies. These sectors would have faced stiff regulations under a Clinton presidency, and will benefit from Trump’s mission to loosen controls of businesses.
• On the currency markets, the dollar hit its highest in nearly four months against the Japanese yen. It had fallen 4% in overnight trading.
• The Mexican peso plunged 13%, before stabilizing at 8.7% at 19.91 pesos to the dollar.
• 10-year Treasury yield rose above 2% – the highest level since January.
• Economists cut their forecasts for H1 2017 US GDP growth by 0.5 percentage points, and warned of “despair in the financial markets”.
• Trump’s economist adviser warned that Janet Yellen’s days as chair of the Federal Reserve are numbered. And the odds of the central bank increasing interest rates in December have lengthened.
• The FTSE 100 fell 2% upon opening on Wednesday, before recovering to end the day more than 60 points up.
• The Japanese Nikkei 225 closed at 5.4% and Hong Kong’s Hang Seng fell 2.2%. to 5,251.

‘Trumpronics’ offers unlimited possibilities

The former chairman and CEO of General Electric, Jack Welch, said “the opportunities are unlimited” under a Trump presidency.

“You look at lower taxes. You look at job creation. We are stuck. We have been stuck in a terrible, overregulated economy for eight years. I mean stuck. Business stinks.”

This was a complete volte-face from his previous withdrawal of supporting Trump, following the leaked revelations that Trump had stated that he could “grope women,” simply because he was famous.

Welch, a long-time Republican, had told CNBC that he had liked Trump’s message “from the first day” but he is still concerned about the messenger. “Every time I lurched forward in support, I’d lose the messenger. He’d do some wacky thing,” he said.

He then said that he had hoped Trump would build a broad coalition of Republican talent in the White House. “You can’t have grudges in this game. You need talent. We will win with the best people,” he said.
JPMorgan’s CEO Jamie Dimon emailed all his employees, calling on business leaders and government officials to listen to the disenfranchised working class voters who helped deliver Trump the election. He said they showed a “deep desire for change”.

Dear colleagues, We are going through a period of profound political and economic change around the world, and American citizens showed that deep desire for change in voting to elect Donald Trump as the 45th President of the United States. We have heard through democratic processes in both Europe and the United States the frustration that so many people have with the lack of economic opportunity and the challenges they face. We need to listen to those voices.

We have just been through one of the most contentious elections in memory, which can make it even harder to put our differences aside. But that makes it more important than ever to bind the wounds of our nation and to bring together Americans from all walks of life. Recognizing that our diversity is a core strength of our nation, we must all come together as fellow patriots to solve our most serious challenges.

Leaders from across the public, private and nonprofit sectors need to collaborate to find meaningful solutions that create economic growth and greater opportunity for all.

America is best when we come together with clear leadership, expertise and the political will to take on difficult challenges and get things done. No one should ever doubt the strength and resilience of our country and our democracy.

J.P. Morgan Chase has a proud history of supporting our communities and our countries. Through your outstanding efforts, we have built a great company that will continue to thrive – as we continue to focus on helping to serve our clients and communities. We will also continue to help address the important public policy issues of the day and the underlying economic challenges throughout the world.

I’m optimistic about America’s future and the role our company will continue to play as we help the nation address our challenges and move forward together. Jamie.

Analysts at Height Securities said: Private prisons would likely be a clear winner under Trump, as his administration will likely rescind the DOJ’s contract phase-out and ICE [Immigration and Customs Enforcement] capacity to house detainees will come under further stress.

Oil companies are benefiting from Trump’s pledge to make America “energy independent,” tear up red tape and allow oil and gas exploration in new areas. He has also vowed withdraw the US from the Paris climate accord, and wants to end the “billions and billion and billions” given to UN climate programmes and clean energy development.

Big pharma companies are also gaining, because Hillary Clinton had vowed to introduce strict controls – preventing pharmaceutical companies from raising the price of drugs; following recent pricing scandals. Shares in Pfizer, the world’s largest drug company, are up 7%.

European markets ended higher despite the Trump’s vote winning shock.

After a wild day’s trading, European stock markets ended the day with solid gains.

In London, the FTSE 100 index of blue-chip shares closed 1% higher at 6911.8.

Given the index had initially plunged by 2% at the start of the trading day (just as Donald Trump’s victory was confirmed), that was a remarkable change of trajectory.

Could Italy be the next big disruptor to the EU and the Eurozone?

With French right’s selection of Fillon, to the Italian referendum + the Italian banking crisis – the political landscape in “Old Europe” is changing rapidly, beyond anything that could possibly, beforehand, have been imagined – post the UK’s Brexit referendum vote, earlier this year.

The question is…could Italy now be the wild card joker in the pack and, therefore, the next big disruptor?

Italy’s referendum could spark another European banking crisis: Economist

This Sunday’s referendum in Italy could kick off another banking crisis in Europe, according to one economist.

“In my view the biggest risk is actually for the banking sector, even more so than political risk, and there will be some political instability,” Megan Greene, ‎chief economist at Manulife Asset Management, told CNBC on Tuesday.

The Italian’s will be voting on whether, or not, to approve constitutional reforms. However, there are many Italian’s who are very disillusioned with the current Prime Minister, Matteo Renzi, who has said that he would resign should the vote go against his proposed reforms. Should that happen…that could be a recipe for the perfect storm of:

A) Political instability – the finance markets do not like political instability.
B) Financial instability – in n already weakened economy and a banking sector mired in debts.
C) According to a report by the Financial Times on Monday, citing officials and senior bankers, up to eight Italian banks could be in trouble if voters choose “no” in the referendum.

When Japan’s banks collapsed in 1998-99, the effect was only felt domestically. Something similar in Italy could, however, cause a domino effect across Europe.

Italy gave birth to the modern-day banking system and The Banca Monte dei Paschi di Siena, which is the oldest bank in the world and which was founded 125 years before Shakespeare wrote Romeo and Juliet. This bank had been trading successfully for all these years – through wars, revolutions and political turmoil’s – during the 1990’s it was, indeed, Europe’s most profitable bank.

However, only this week the European Central Bank agreed the financial details of (yet another) bailout package for the banca, which was previously rescued in 2013.

The debt problem of the Italian banks

According to a recent Guardian newspaper report: currently Italian banks have amassed £290bn in bad loans – around 18% of all loans in the country and one third of bad loans in the euro area. More than 75% of these are loans to companies. Banks cannot write these off, as it would render many institutions insolvent – they do not have sufficient capital to clean up their balance sheets.

Regulators, chiefly the Banca d’Italia, are aware of the situation, but are faced with cumbersome corporate restructuring and insolvency procedures, as well as long judicial processes and tax rules that discourage rapid write-offs. Critics point the finger at regulators they say have been too slow to act, and to “evergreening” – the process by which bad loans are rolled over in the hope they will eventually be repaid. (The Guardian, 28/11/2016 – opinion report).

The Italian economy is slowly, but surely, stagnating

For the last three years, the Italian economy has been stuck in neutral and, additionally, Italy is also bearing the brunt of the refugee crisis – along with its counterpart, Greece, which is also in deep, financial trouble and is dependent on EU/IMF loans to keep it afloat.

In a nutshell – Italy is facing almost exactly the same crisis as Japan was facing (and was very slow to admit and act upon) from 1998-1999, when its banking system all but collapsed. This as something, which the Japanese authorities had known about for almost ten years, before their house of cards finally caved in on them.

This (eventually) led to a major restructuring of their bank and a series of bank mergers, with the Japanese economy becoming stagnant for almost ten years – due to a basket of unorthodox (and other financial measures) having being imposed by the authorities + a lot of quantative easing by the central bank.

The difference between the Japanese crisis and the Italian crisis, however, is…the Japanese crisis was entirely self-contained. I.e. It was entirely a domestic crisis and it is here that the similarities end, because an Italian banking sector collapse could spread into other EU countries, whose banks are also struggling with toxic debt problems – countries such as Greece, Spain, Austria and Portugal.

Speed in clearing up this Italian banking mess is crucial and there are plans being laid to plans to incentivise the sale of bank bad loans through investment vehicles and other initiatives. However, the Italian banks need a huge amount of restructuring and government incentives to effect these changes.

Luckily enough, the UK’s banks are not now quite so heavily exposed to the Italian banks toxic debt problems – having reduced, over the last three years, or so, their exposure and thus…they have few bad loans outstanding on their books.

Thus, the much-needed reforms, to a centuries way of conducting the Italian banking affairs, is likely to prove – at best…painful and…at worst…highly unpopular. In the meantime, the Italian economy is slowly, but surely stagnating. The danger to the Eurozone is this …in a very much weakened Eurozone – the effects could become contagious and quite quickly at that.

Euro DIVES amid fears Italy’s referendum is beginning of the END of EU – shouts the UK’s Daily Express headline. Tue, Nov 29, 2016

As the vote draws closer, investors are now dumping the euro. Caxton FX analyst Alexandra Russell-Oliver said: “Political risks remain a downwards pressure on the euro; attention at the moment has largely been on Italy’s constitutional referendum on 4 December.”

More immediately, Mr Renzi’s failure is likely to plunge Italy’s fragile banking sector into chaos, sending panic waves across Europe’s financial system.

As many as eight of Italian lenders could buckle amid a crisis of investor confidence in the country, it is feared.

Darius McDermott, managing director of FundCalibre, said: “If Renzi loses, European market reaction may well be stronger and longer than we have seen in the post-Brexit and post-Trump days as investors worry that this could be the beginning of the end for the EU.

“It could be a serious trigger point and bad for risk assets.

“European banks could take a hit and bond yields could widen in the periphery countries – the cost of Italian government debt would likely spike, which might ripple through to other southern countries such as Spain and Portugal.” (Daily Express, 29/11/2016)

A new political upset in France arises

The Guardian newspaper (29/11/2016) writes that François Fillon’s very recent victory in France’s right-wing presidential primaries shows that liberal progressive values in Europe aren’t just confronting the ghosts of fascist-type movements. There is now a threat from a new type of reactionary movement.

So, what does all of this mean?

Taking into consideration that Donald J Trump had (earlier this month) won the US presidential election, over his adversary Hillary R Clinton + earlier this year, in June, the UK voted to kiss goodbye to the EU, what this really means is this…many people, the commoners, have become rather tired of the old, established political elite and the old, established ways of doing things.

This is not just a new “populist” movement, which is gaining ground, but a whole demographic and seismic shift in the EU political arena, which is taking hold. This weekend, Austrians may elect a far-right president, while the centre-left Italian government could fall after this Sunday’s constitutional referendum. The EU is in deep trouble, and whether the financial markets like it or not – deep, political landscape changes are coming.
François Fillon, writes the UK’s Daily Telegraph, is a former prime minister who has promised to enact radical “Thatcherite” economic reforms in France, has won the presidential nomination for France’s main conservative party after trouncing his more moderate rival at primaries on Sunday.

Mr Fillon, is a social conservative who opposes multiculturalism and has called for a new understanding with Vladimir Putin’s Russia, is now expected to face off against Marine Le Pen, the leader of the far-right Front National, in presidential elections next May.

“My approach has been understood: France can’t bear its decline. It wants truth and it wants action,” Mr Fillon told supporters at his campaign headquarters as he accepted the Republicans party nomination.
“I will take up an unusual challenge for France: tell the truth and completely change its software,” he said.

Allain Juppé, a former prime minister who was long considered the favourite to win the Republicans party nomination, conceded defeat after partial results handed Mr Fillon a decisive lead with almost 70 per cent of the vote.

“I congratulate François Fillon for his clear victory,” Mr Juppe said.

“This evening, I offer my support to François Fillon and I wish him victory next May,” he said.

Juppé has also taken a hard line on Islam, saying the religion must change in the wake of terror attacks that have left 230 dead in the past two years.

“The Islamic religion (must) accept what all the others have accepted in the past… that radicalism and provocation have no place here,” he said at his final Paris rally on Friday. (Daily Telegraph 28/11/2016)

So, what does all of this mean for the EU and the Eurozone? Very simply it means this…there is a cold wind blowing right now – a cold, stark wind of change, which is starting to heat up the ‘Old Europe” political, elite and their ways of doing things.

Therefore, what all of this actually means is this…s Bob Dylan once sang…” The times, they are-a-changing.” But, how they are changing is anyone’s guess for now.

However, I think I can safely predict one thing for certain for 1017…things are about to get a whole lot worse, once the New Year’s celebratory hangover’s have disappeared.

On ‘Jupptromics’

On the economic front, he has promised to break with France’s statist tradition and to roll out an ambitious free-market programme that will undoubtedly set him on collision course with France’s unions.

His pledge to slash half a million state sector jobs, jettison the 35-hour week, and pay ‘functionaries’ 37 hours for working 39 were branded “brutal” and unworkable by Mr Juppé.

He is also a a strong admirer of the late Margaret Thatcher, “We are in the same situation as Britain before Thatcher. We need a leader who is able to say no to unions and withstand boos and the storm,” said Thierry de Ravinel, a lieutenant colonel in the French army voting in Evry, south of Paris.

There are, however, concerns about Mr Fillon’s support for a US alliance with Vladimir Putin, the Russian president, over Syria.

Britain is strongly opposed to such an alliance amid concerns that it will bolster the Assad regime.

Reuters has this comment, on his economic plans for France, “On paper, French presidential favourite Francois Fillon’s free-market plans to cut business taxes, relax labour laws and shrink the public sector should give corporate France a shot in the arm and boost economic growth.

But his reforms are likely to come at the cost of showdowns with labor unions and public-sector workers who face losing jobs in a country where strikes can often drag on for several weeks if not months.

He could also clash with Berlin over a ballooning budget deficit, while a sales tax hike that would help pay for his other plans risks dampening consumer spending.

Fillon says he would introduce 50 billion euros ($53 billion) in tax cuts – worth about 2.5 percent of GDP – with most of that targeting companies’ payroll tax.

The loss of state revenue would be partially offset with a 2-percentage point increase in value-added sales tax, by far the government’s biggest source of tax revenue.

Economists liken the move to a currency devaluation – something outside French authorities’ power as a member of the euro zone – because firms could sell at more competitive prices abroad while importers face higher prices, thus improving the overall terms France trades on with the rest of the world.

“The aim is to rebalance France’s growth model towards exports and away from solely relying on consumption,” said economist Emmanuel Jessua at Coe-Rexecode think tank.

Company CEO’s and directors like Fillon’s plans

“He’s taken on board all of our concerns,” the head of the MEDEF employers association, Pierre Gattaz, told journalists. “There’s a lot of bosses backing Fillon.”

With proposals to shrink the public sector and spending by cutting 500,000 civil service jobs and reducing unemployment benefits, critics have characterized Fillon as a man who threatens France’s cherished welfare system.

Fillon’s plans to cut public spending to 49 percent of output by 2022 would still leave it well above the current OECD average of 45 percent. (Reuters World News, 29/11/2016).

However, how he will fare in the French general elections next year, against Marine Le Pen, remains to be seen.

Although the pundits suggest Fillon will win…they were wrong with Brexit and Donald J Trump. Therefore, they could well be as equally as wrong with Fillon, winning the French presidential vote, over Marine Le Pen.
THE EU could come to an end following France’s upcoming election, which is likely to be contested by two Eurosceptic candidates.

The Daily Express writes, “Outspoken author Germaine Greer outlined her fears the EU could come to a bitter end with it collapsing in “great disorder” prompted by the new French president potentially holding their own EU referendum.

Speaking on ITV’s The Agenda, the Australian-born commentator said: “My terror is that France will pull out of the EU – and then the EU will collapse in such disorder that the ruins will catch us all up.”

Fillon has said: “Today Europe at best is inefficient, useless, out fashioned and, at worst, is an obstacle to our development and our freedom.”

Mr Fillon added that a lack of understanding between people and politicians has led to an identity crisis, fuelling a rise in populism and extremism.

He then says, “That a lack of understanding between people and politicians has led to an identity crisis, fuelling a rise in populism and extremism.”

“The situation is critical and if we do not want the dream of the founders of a democratic European civilisation open to the world, turn into a nightmare, we must change Europe.”

Despite being critical of the bloc, Ms Le Pen blasted Mr Fillon claiming he was the spokesperson for “the very worst European Union ideologies.”

In an attack on her rival, the Front National leader said: “Mr Fillon’s social reforms will tear the country apart, they are the worst.

“I also think that his pro-EU project is terrible. He is willing to comply with the EU’s ultra-liberal demands – no right-wing candidate has ever been so compliant. (The Daily Express, 29/11/2016)
What a November this has been

Without a shadow of a doubt, this has been on hell of a November month: to see out the most memorable ear of 2016, in the for world of forex and finance. The best, however, is still yet to come, in 2017. My view is, to quote Nigel Farage, that “2017 is going to get a bloody sight worse.”