Lack of belief in President Trump’s policies and elevated political risk within France created a risk off environment last week. Despite the equity market highs, market participants are beginning to wonder whether the reflationary trend is sustainable. Interest will be focused on Donald Trump’s speech to a joint session of Congress on Tuesday evening, where he is expected to unveil some elements of his plans to cut taxes. Any delay adds to the caution already in play.
February’s US PMI surveys pointed to slower US economic growth. The drop in the numbers suggested that the post-election upturn has lost some momentum. But the real worry is that a drop-in business optimism about the outlook could mean that companies will become cautious over their spending plans.
US manufacturing data was also mixed, restrained by subdued exports, which once again barely rose in February. Producers blamed the strong dollar as a main cause of poor foreign sales, leaving domestic demand as the key source of new orders.
However, minutes released from the Federal Reserve’s latest policy meeting pointed to continuing strong economic growth, signalling at least one rate hike in the near term. Nevertheless, Janet Yellen, the Fed chair, acknowledged the uncertainty surrounding the Trump administration’s ambitious policy proposals. Until we gain some clarification on Trump’s policies the markets will continue to swing between risk on and risk off days.
UK banks reported results last week. Lloyds Banking Group surprised investors, announcing its highest profit since the financial crisis, having overcome the PPI mis-selling scandal. Pre-tax profits of £4.2 billion were slightly below analyst expectations, but represented a major increase on last year’s figure. The surge in profits allowed the bank to give something back to investors in the form of a £2.2 billion special dividend. Profits were also on the up at Barclays, which announced a tripling of pre-tax profits compared to the same time last year.
However, there was more disappointment with the Royal Bank of Scotland. It reported its ninth consecutive annual loss, totalling £7 billion due to mis-selling and conduct charges. Meanwhile, HSBC unveiled a sharp fall in full-year earnings, leading to falls in its share price
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