Fundamental Analysis

Tax Bill Passes The Senate, Investors Rotate From Tech To Financials

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U.S. stock indices ended mixed on Wednesday. While the Dow-Jones industrial average closed at a record high after U.S. GDP showed the economy grew at a revised rate of 3.3%, Tech stocks dragged the Nasdaq down, closing 1.3% lower. There has been a significant rotation from the Tech sector to financials on bets that the giant multinationals willbenefit the least from U.S. tax legislation, whereas the rise in long-dated U.S. bond yields were seen asa positive sign for banks’ profit margins.

As we approach the end of 2017, investors are likely to reassess their portfolios. Few may disagree that stocks are very expensive, but expectations of tax reforms, synchronized economic growth, accommodative monetary policies and robust earnings, were all factors that helped shares surge this year. Given that the tax bill passed the Senate Budget Committee on Wednesday, it looks like we are getting closer to a deal, but this does not necessarily mean that bulls will get overly excited. I think much of the premium for tax reforms has already been priced in, and I won’t be surprised to see the scenario of “buy the rumors and sell the news” when we get the deal done. Monetary policies can only get tighter at the current stage which is another negative factor for risk assets. This leaves us with few factors that may justify further upside in stocks in 2018, so investors might start considering protecting their portfolios from any potential pullback.

Bitcoin: Bull, Bear then Bull!

Bitcoin continued to be the news making headline this week. The cryptocurrency moved from a bull to a bear market (a drop of 20%) then back to a bull market in less than 24 hours. I cannot remember in my career seeing an asset with such volatility. Bitcoin traders blamed the outages and poor execution at exchanges for the pullback, but as the price approached $9,000 new inflows came in, and the price surged again. This scenario has been repeated throughout the year where every sharp pull back attracts new inflows. It’s impossible to predict a price target for the bitcoin at this stage but I can say it’s going to be the most volatile asset class in history. If you are a faint-hearted investor, stay away.

Pound hits two months high

Sterling is the best performing currency early Thursday. GBPUSD hit a new two-month high of 1.3479 on hopes that the U.K. is close to reaching an agreement over the divorce bill. The fall in consumer confidence was totally ignored, and the current move is based on media reports rather than official ones. Although Sterling continues to look cheap from a fundamental perspective, Sterling bulls may be disappointed if no agreement is reached in the EU Summit in mid-December. However, if positive news continues to flow, I think the pound may be headed towards 1.36 – 1.38 in the next couple of days.

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