The new U.S. president starts his four-year term with the country's equity markets at near record highs. Donald Trump's November 2016 victory sparked a strong rally in U.S. share prices following campaign promises of fiscal stimulus, infrastructure spending and relaxed corporate regulation.
Some of this investor optimism faded last week amid a perceived lack of clarity on important growth policies, such as tax cuts. In the week to Wednesday, Jan. 18, equity funds in the U.S. suffered US$2.5 billion in outflows, the largest withdrawal since the election.
Nevertheless, expectations of global economic growth have reached their highest level in two years, according to a survey of fund managers by Bank of America Merrill Lynch. The poll showed that 62% of the investors polled expected a stronger global economy this year, up from 57% last month. A net 83% of the fund managers expected higher inflation.
The forecast of higher inflation has been difficult for bonds, which have suffered a sharp sell-off globally. Bond prices have suffered particularly in the U.S., with the market there expecting higher interest rates — and so bond yields — to accommodate the extra funding likely to be required by the new administration.
Despite expectations of higher U.S. interest rates, trading in the American currency has been volatile. Leading up to his inauguration, Trump had expressed concern about the strength of the dollar. However, his nominee for treasury secretary, Steven Mnuchin, calmed currency markets last week by indicating that the new administration would not adopt a weak-dollar policy. The U.S. currency also found comfort in hawkish comments by Janet Yellen, chair of the Federal Reserve, about interest rates.
Higher American interest rates have been made even more likely by recent Chinese sales of U.S. government debt, with Beijing's holdings seeing their biggest monthly drop in almost five years in November. The sales of US$66 billion extended the disposal trend to six months, which has seen China cede its position as the largest foreign owner of U.S. Treasuries to Japan.
China has been selling dollars to support the renminbi, which has been falling against the U.S. currency amid concerns over the health of the Chinese economy. However, the country's gross domestic policy grew 6.7% in 2016 and achieved a creditable 6.8% at an annualized rate for the fourth quarter, in real terms, compared with 6.9% in 2015. Although last year saw the slowest full-year growth rate since 1990, it was within the government's target of 6.5% to 7.0% and was above the expectation of most analysts.
With so much uncertainty, it was a largely lackluster week for mined commodities. Of the major metals, aluminum and gold strengthened slightly, iron ore was little changed and zinc and copper slipped back. The only major casualty was nickel, which fell on the week almost 7% to US$9,710 per tonne. Thermal coal rose 3.5% to close on Friday at US$89 per tonne, but coking coal has had a stuttering start to the year. After more than quadrupling in 2016 to over US$300 per tonne, coking coal was back below US$180 per tonne last week, as Chinese mines have increased output in response to pressure from Beijing.