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Financial Markets Wind Down Year in Normal Pattern

Financial Markets Wind Down Year in Normal Pattern

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By    |   Wednesday, 21 December 2016 08:06 AM

Financial markets are winding down the year with the normal pattern of thin conditions and occasional inclinations to be optimistic about the future.

It remains to be seen whether the traditional curse of first quarter data when U.S. growth numbers underperform before subsequently being revised higher many months later will dampen the start to the new year.

In the meantime, there are some desultory data releases to distract those who contemplate economic realities.

Over in Europe, French producer prices continued to rise and came in at + 0.8 percent month-on-month in November, which was the same as in October.

This follows the surprising strength in the German equivalent measure earlier this week, and although some of the moves may be attributed to oil prices, it is rare that oil prices create a surprise in inflation numbers. Economists are pretty good at factoring in the consequences of a higher oil price.

As producer price inflation is a better reflection of company pricing power than is consumer price inflation, this is something that investors could do well starting to monitor these data from hereon.

Of course, inflation pressures have been building more noticeably in the German economy than they have in the French economy. The German labor market is tight to a degree that is currently unimaginable in France, but a more general increase in pricing power in the Euro area, which shows early indications in that direction would for investors be worthy of note.

The just released UK public sector net debt data shows it hit its highest level on record at 1.65 trillion British pounds (USD $2.04 trillion) as the British government borrowed more than expected in November.

As an investor one should better keep in mind the fiscal situation in the UK is only likely to be strained further with a slowdown in economic activity expected next year, and in the longer term a potential threat to the net fiscal contribution that is made by migrant workers.

The increase in inflation that is expected next year will also add to the government’s expenses through higher debt service costs. Remember that a large proportion of the UK national debt is currently financed through inflation linked securities.

There is also the impact of indexation of benefits and so on. As the inflation is driven by external factors like import prices and oil base effects, it is by no means certain that there will be any corresponding inflation of the government’s revenue stream.

Besides that, Prime Minister Theresa May when speaking to the House of Commons Liaison Committee yesterday, refused to confirm whether Parliament will be given a vote on the final Brexit deal. Interestingly, she also insisted that the Government is not seeking to extend the Article 50 process, however, she added, “it may be the case that there are some practical aspects which require a period of implementation thereafter."

In simple words that means that the whole Brexit event will probably take much more time than most think at present it will.

In Italy, this morning, shares in Italy’s oldest and most troubled bank Monte dei Paschi have been suspended after fresh concerns about its precarious liquidity position. Shares in UniCredit, Intesa Sanpaolo and Mediobanca are all dropping more than 1 per cent in a volatile session of trading at present.

In the United States, we’ll have the Mortgage Bankers' Association purchase applications index that measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction. We’ll also have the existing homes sales data that account for a larger share of the market than new homes and indicate housing market trends.

For now, investors should not have to pay too much attention to this, but, and this is important, they will have to start keeping a closer eye on this sector of the U.S. economy in the future.

The shortage of skilled workers is a constraint on the construction industry. Around 80 to 85 percent of construction workers are in fact skilled, semi-skilled. The un-skilled in the construction sector do tend to be very low-skilled and there is a surplus of very low-skilled labor in the United States, but the bottleneck of skilled labor, then combined with Trump’s intention to stimulate through infrastructure is likely to create strains in the provision of housing to the United States.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

 

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Financial markets are winding down the year with the normal pattern of thin conditions and occasional inclinations to be optimistic about the future.It remains to be seen whether the traditional curse of first quarter data when U.S. growth numbers underperform before...
markets, economy, investing, Europe
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2016-06-21
Wednesday, 21 December 2016 08:06 AM
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