In the pre-opening, the European indices have declined slightly. The banking sector will again be in focus. In the last two months, there has been a profound change in investor sentiment in this sector. At the end of the third quarter, given the uncertainties of Deutche Bank and the Italian banking system, there was a certain pessimism about the European banking sector. These factors were compounded by weak prospects for profitability as a result of the increasing and severe regulations, the low level of interest rates and the modest growth of the Euro Zone. As a result of all this, the exposure of institutional investors to the sector was the lowest in recent years. The rise in European yields and the increased risk appetite triggered by the US elections, among other factors, have altered investors’ perceptions. At a conference recently held by UBS, most investors believe that bank shares will be the best-looking investment in Europe in 2017 and the sector is the one with the highest profit-making potential.
As expected, the Fed raised benchmark rates by 0.25% for the range of 0.50% to 0.75%. This decision had already been anticipated and investors’ attention therefore fell on individual projections for future interest rate increases. On average, Fed members anticipate three key rate hikes in 2017, two in 2018 and three in 2019.
The overperformance of cyclical stocks in relation to more defensive stocks has peaked since the beginning of this Bull Market in 2009. One of the causes of the rally in European markets (in addition to the favorable influence of the American markets) has been the strong appreciation of the banking sector. Within this sector the protagonist has been the Italian banking sector which has shown remarkable resilience to a number of negative factors such as the outcome of the referendum and capital increases of Unicredit and Monte dei Paschi di Siena.
US markets closed without major fluctuations, with volume boosted by the maturity of futures and options. However, the news of the seizure of an American drone by China has led to a more defensive stance on the part of investors. This more prudent position translated into a purchase of state bonds, which simultaneously caused the yields to fall. The decline in state yields, which hit the highs this year, boosted interest-sensitive sectors such as real estate and utilities, which prevented major indexes from suffering further losses.
Yesterday the main event of the day was the intervention of Janet Yellen at the University of Baltimore. The President of the Fed stated that the current phase of the labor market is the strongest in the last decade and that it is beginning to see an acceleration in wage growth. With a 4.70% unemployment rate and the economy running at full employment, it becomes increasingly difficult to find workers (especially for those jobs that require more skills), which forces employers to pay higher wages.
Today, a session with a reduced volume should be attended, and so, the lack of liquidity could generate some more pronounced movements. The Dow Jones test at 20,000 points will be the main theme of the day. Also to be added that the US oil reserves will be published at 3.30 pm.
Despite all the financial media coverage of the Dow Jones’ 20,000 points, investors have been pausing in recent days, resulting in a period of consolidation. The year can be considered ended and can also be considered a good year. Faced with a series of unpredictable events, such as Brexit and Donald Trump’s victory, and how the year started (with a strong correction due to the devaluation of the Chinese currency) to achieve gains between 8% and 12%, 2016 was a particularly positive year. It is quite natural that investors choose to take a break, operating in the market just to position their portfolios for the new year.
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