The price of oil went up
Crude oil prices closed at their highest level in 3 weeks yesterday after Kuwait gave its backing for an extension of OPEC production cuts. Higher oil prices have a positive correlation with stock prices mainly because there are many energy production companies that are publicly traded so when those stocks rise that is a positive for stock prices. In addition, banks lend money to energy companies so when oil does well, that helps some of the financial stocks which have indirect oil exposure.
Interest rates may actually rise this year
Federal Reserve (Fed) speakers suggested a possible need for a faster rate-hike path. Boston Fed President Eric Rosengren on Wednesday suggested that 4 rate hikes this year is a possibly, while San Francisco Fed President John Williams said he would “not rule out more than 3 increases total for this year”.
The Federal Reserve has already raised interest rates once in mid-March by 25bps. The Fed controls interest rates via the federal funds rate, which is the rate at which banks can lend money to each other overnight. As the rate increases, so does the cost of lending between banks which is meant to slow down the overall economy. While slowing the economy may seem counterproductive, the Fed is doing this because part of their mandate is to control inflation. When the Fed believes inflation is increasing faster than their objective rate, interest rate increases are done in order to slow down the economy and therefore the rate of inflation. Fed forecasts currently suggest 2 more rate hikes this year.
Higher interest rates are good for financial stocks, however, because financials such as banks lend money to consumers (think mortgages) so when interest rates increase, bank profits should also increase. As a case in point, yesterday’s market gains were led by financial stocks.
The economy is doing a little better than people thought
US economic growth revised higher, boosted by consumer spending as Gross Domestic Product for the 4Q of 2016 was reported to have increased at a 2.1% annualized pace rather than the previously reported 1.9%. The upward overall revision was led by stronger consumer spending.
PM May triggers ‘historic’ Brexit – Reuters
On March 29, Prime Minister Theresa May officially triggered Article 50 of the EU’s Lisbon Treaty and notified EU President Donald Tusk that Britain would be leaving the European Union. This follows the June 2016 referendum vote in which 51.9% of British citizens voted to leave the EU. The Prime Minister now has 2 years to negotiate the terms of Brexit before it comes into effect in March 2019. May’s challenge will be to negotiate with the other 27 EU states on issues such as trade, security, and finance, while also managing renewed calls from Scotland nationals for their own independence referendum.
Trump, conservatives try to put aside bitterness to cut tax deal – Reuters
Donald Trump and the Republican party are seeking to rebound from their defeat on healthcare legislation by launching an overhaul of the U.S. tax code. One of the key features of the current blueprint plan is to cut the corporate tax rate form 35% to 20%, meaning US companies would retain more earnings in order to reinvest in the economy and create jobs. However, cutting taxes is not simple as it results in a loss of government revenue at a time when the budget deficit is already high (around $580bn at the end of 2016 per the WSJ). To counter this, some lawmakers have proposed creating a ‘border adjustment tax’ that would tax imports at 20% in order to offset the cuts, but this will harm many companies and is very controversial on its own. This development will be important to watch as hopes for corporate tax reform have been one of the key drivers of rising expectations for corporate earnings and the increase in stock prices over the past several months.
Blackrock bets on robots to improve its stock picking – WSJ
Blackrock, the world’s largest asset manager, is overhauling its stock picking business and will be relying more on computer models to make investments rather than humans. The changes include job cuts as well as lower fund fees. The move comes as passively managed investment funds, which often charge the lowest fees to manage versus an index, continue to see large inflows versus actively managed funds that aim to beat the market.