Global equities fell sharply and the dollar had a choppy session as President Donald Trump’s executive order banning travel from seven Muslim-majority nations added to the mood of uncertainty in the markets as a busy week of economic data releases and central bank meetings got under way. Recurrent lack of clarity from Trump on his tax and infrastructure changes has resulted in some retreat in equity markets, despite some key players issuing a strong set of earnings this week. The week ended on a high however for equities as markets were lifted by the prospect of US president Donald Trump undoing parts of the Dodd-Frank reforms of the banking industry. Energy shares also powered ahead as crude oil prices rose as the US Treasury Department launched a fresh round of sanctions against Iran in the wake of its test launch of a ballistic missile.
Measures of this kind taken by the government make the US unattractive as a location for investments and the dollar unattractive as an investment currency. The dollar gained ground however towards the week as the courts repealed the President’s deemed to be unlawful ban and the government’s subsequent appeal against the order denied.
Gold edged ahead this week as investors got nervous due to the uncertainty around policy and its effects.
Investors continue to absorb last Friday’s news that the US, the world’s biggest economy, expanded in the fourth quarter by a weaker than expected 1.9 per cent, on an annualised basis. The economy grew 1.6 per cent for the whole of 2016 — its weakest in five years.
Fed and BOE left rates unchanged this week. The Fed did not indicate any future interest rate rises resulting in the dollar weakening and added to gold and oil rising – oil helped by the new sanctions against Iran by the US.
The pound has advanced against the dollar this week due to new Trump policies and Fed rate unchanged that causing weakness in the dollar but also due to the BOE issuing new growth forecasts implying the economy will be 1.5 per cent smaller in three years’ time than it would have been without Brexit. This is significantly better than the 2.5 per cent reduction that was forecast in November. They are putting this down to the rate cut in August that has gained more traction than initially expected. Since November, sterling has also strengthened, reducing inflationary pressures since the last forecast.
At the same time this week, the UK government set out a Brexit plan strategy in a white paper the government has published on its blueprint for Brexit. The document is based around the 12 principles laid down by Theresa May in her Brexit speech last month, including exit from the single market and continued intelligence cooperation. That helped ease investors worries about the future of the UK.
US Treasury yields are dropping as a result of government bonds in demand amid uncertainty at the minute in the markets and the Fed not indicating any future rate rises.