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Global Market Commentary – December 2017

10 January 2018

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by Peter Little

The S&P 500 produced another positive return in December, making 2017 the first year in the index’s 90- year history with a positive return in every calendar month. Although the 22% return for the year is only the thirty-third best annual return for the S&P 500, the year stood out for the consistency with which stocks performed.

While it was tech stocks that drove the early gains for the year (the much talked about FAANG stocks [Facebook, Apple, Amazon, Netflix and Google (now Alphabet)] and Microsoft contributed 25% of the annual performance between them), it was the old economy stocks that led the way in December. US energy counters were up meaningfully as Brent crude oil finished the year on a strong note, ending 2017 at $68/barrel – up 50% off its June lows and 5% in December as an explosion at a major Libyan pipeline dragged on supply. US airlines also rallied on news of strong demand and improved pricing power, while offline retailers continued their fight to regain market share from the likes of Amazon. Technology retailer, Best Buy reported surprisingly good results from its Black Friday trading as it achieved some success in luring shoppers back offline. Meanwhile, home-improvement and appliance retailer, Lowe’s, announced that it had created a new position of chief digital officer, where it employed Vikram Singh from Amazon, showing its intent to fight for its share of online sales – both stocks were up over 10% in December. US banks, key beneficiaries of new tax legislation signed into law by President Donald Trump in late December, were also up strongly for the month. The new legislation is expected to deliver $1.5trn in tax relief to companies and individuals over the next 10 years.

European stocks were lower in December as a strong euro weighed on the export-heavy German index and continued uncertainty in Spain, regarding the sovereignty of the Catalan region, dragged on sentiment. In emerging markets, Brazil led the way as its miners benefitted from a rally in iron ore prices.

US 10-year bond yields ended the month and year roughly where they started, despite three rate hikes by the US Federal Reserve (Fed) in 2017 (this followed one rate hike in each of the previous two years). The US Fed’s midDecember rate increase was very much in-line with expectations as was the European Central Bank’s (ECB’s) announcement at its December meeting that it would continue its quantitative easing (QE) purchases through September 2018. ECB President, Mario Draghi’s press conference after the rate announcement indicated that the ECB were encouraged by European economic activity but remained concerned at the lack of inflation (particularly in wages). European bonds, much like the US treasuries, were largely unaffected by the ECB meeting, but late in the month European yields spiked in light volume on hawkish comments from some ECB members.

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