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2 November 2016

Finance & investing wrap - November 2016

By Clive Hale, director

With the polls looking to be less and less reliable in the lead up the US election, the result could feasibly go either way. Trust in politicians is a key issue across the UK, the US and Europe, and nowhere is this being more obviously played out right now than in the battle to become America's next president.

There is growing undercurrent of disenchantment with the 'status quo', which may in turn be reflected in the Italian referendum result next month and the French and German elections next year.

We take a look at the key events you need to know about, region by region, in October.

United Kingdom

The UK economy has been strong since the Brexit vote, with third quarter gross domestic product (GDP) coming in at 2.3% – of course, Article 50 is yet to be triggered, so we're yet to see any real changes to 'business as usual', at this stage.

We are possibly in something of a honeymoon period, as inflation, driven by a significantly weaker pound (down 18% against the US dollar and 16% against the euro) has yet to pick up with any vengeance. Sterling weakness has helped our exporters, but it will almost certainly trigger price rise concerns as our trade gap is still yawningly wide. This will give the Bank of England problems over whether, and when, to start raising rates.

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United States

Polling day may not be the end of the comedy of errors that is the US presidential election. Apart from having a first “bloke” in the White House, things will probably be back to normal if Hilary wins and the markets will no doubt be in celebratory mode.

If Trump wins, however, the knee jerk reaction would most likely be down and it might then be an interesting lesson to see how the markets respond between next week and when he would be sworn in, in January. Uncertainty abounds and we haven’t mentioned the possibility of a December rate rise yet. Given that's up in the air at least until the election result is known, for the time being we'll simply say that bond markets are getting a little spooked with the 10-year US treasury bond yield rising from 1.3% in July to 1.85% currently. 3% is not an unrealistic target technically, but that could have a very negative impact on equity markets, not to mention existing bond holders.

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The only trend in the eurozone that is 'improving' is the inflation rate, which in more normal times would be as a result of loose monetary policy. At the moment, however, energy prices account for much of the rise. Unemployment on the other hand is stubbornly stuck above 10%. Youth employment (15–25 year olds) remains above 20%; neither statistic is encouraging for further European harmonisation, and the immigration issue is far from resolution.

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The Nikkei 225 has had a very good month and broken above resistance at 17,000. Support should hold at around the 200-day moving average currently at 16,500. We have seen some yen weakness against the dollar. In fact it is more a case of dollar strength on the back of the increasing odds of a December rate rise. If the US Federal Reserve opt not to raise, the yen will likely regain lost ground.

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Asia Pacific and emerging markets

China’s slowdown is still a concern, as is the ongoing devaluation that it is exporting deflation to the rest of the world. Against a basket of currencies including the euro, the exchange rate has been remarkably stable, leading one to wonder just what the Chinese government's reaction would be to a very weak euro and a very strong dollar. They are still very new to this intriguing game of forex...

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Commodities and gold

As expected, oil doesn't seem to be able to sustain a price above US$50 a barrel point. The tentative output reduction by the oil producers is falling into disarray, as Iran refuses to take any action until it has 'made up for lost production' during the US-led embargo. That may take some time. Copper, soya beans, coffee and natural gas have all been firm and lumber; US home building has been very weak.

Gold is trying to rally but is currently in no man’s land between US$1,300 and $1,200; a break either will be decisive.

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Bond world does seem to be smelling the coffee, with yield rises across all markets. If yields continue to rise, losses will be mounting for existing holders, who have always considered bonds to be the safe haven. Where does that 'funk' money go then, with cash often offering negative real returns? As equities now yield more than bonds, they are, allegedly, the risk-off asset. Really? Despite its failings in the interest rate department, cash may have significant attractions in the short term.

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Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.