Macro Update on Oil, U.S. Job Market, Stocks and Bonds Markets, and China
On Oil:
On Nov 30, 2016, oil prices rose more than 9%, as investors were hoping a deal determined by major oil-producing nations would help oil prices break out from a punishing slump, which has lasted over two years. The percentage gains were the biggest for U.S. and international crude prices since February. The Brent global benchmark broke above $50 a barrel for the first time in November, while U.S. crude futures rose 9.3% to $49.44. After weeks of doubt that members of the Organization of the Petroleum Exporting Countries (OPEC) could resolve their differences, the Agreement to be effective from January 1, 2017 that was concluded at the 171st Meeting of the Conference of the OPEC held in Vienna, Austria seemed to surprise many investors.
On U.S. Job Market:
The U.S. unemployment rate declined by 0.3% to 4.6% in November. Total nonfarm payroll employment increased by 178,000. The pace of U.S. job growth is slowing, and employment gains occurred in professional and business services and in healthcare. The November report offers the final labor-market snapshot before Fed officials meet to decide whether or not to raise interest rates.
On Stock Markets:
In November, the Dow Jones Industrial Average (DJIA) rose 1.98 points to 19123. The 30-stock average rose 5.4%, which was its best performance since March; it set eight records in November and crossed 19000 for the first time on November 22, highlighting a furious U.S. stock rally that began the day after the surprise election of Donald Trump as president. The U.S. Treasury yields reached their highest level since July of 2015, concluding a month considered by many traders as the most eventful in financial markets since the euro crisis ended in 2012. Many analysts and investors expect November’s popular trade, buying stocks and selling bonds, to remain in vogue for the balance of the year. They cite generally upbeat U.S. domestic economic reports, increasingly sanguine signs from overseas and expectations that the U.S. economy will continue its gradual expansion.
There have only been 28 other examples since 1950 where the S&P 500’s monthly close is greater than the prior month and the low of the month was lower than the prior month. In other words, this November’s price action has completely engulfed October’s trading range. The same is true on the Russell 2000 and Nasdaq charts. Historically, this has been a bullish development with above average S&P forward returns and positive hit rates.
On Bond Markets:
The worst bond rout in three years deepened on Dec 1, 2016, hammering debt issued in emerging markets and many U.S. states and cities, while sparing large companies the brunt of the impact. The yield on the 10-year Treasury note rose to a 17-month high, at 2.444%, up from 2.365% Nov 30, 2016. Yields rise as bond prices fall. The surge since July has pushed the 10-year yield up by more than 1 percentage point, only the fourth time it has risen so much so fast since 2009. Rising rates can reflect optimism about economic prospects, yet over time they can also slow growth by making borrowing more expensive for consumers and businesses. The bond rout may not yet be over; a wage print at current level would likely cause another round of bond selling. Incidentally, Strategas’ Fair Value model for the 10-year yield, which is a “cost of carry” model that, in theory, contains no term premium, is suggesting a yield of around 2.25%. Meanwhile, Strategas’ Regression model, which is a fundamentals-based model, and embeds a term premium, suggests 2.75% is the proper level. With a Fair Value of 2.25%, the current 10-year yield of 2.30% is now showing a positive term premium, while a more appropriate term premium should be about 50 bps.
On China:
The People’s Bank of China (PBOC), China’s central bank, has stepped up efforts to drain cash from the country’s financial system, as it seeks to control excessive borrowing. The cost for banks to borrow from each other rose to 3.49% in a week, as measured by the seven-day repo rate, which was a 19-month high. The surge followed the PBOC’s withdrawal of a net $18.85 billion from China’s money markets over the four trading days until November 29, which has been partially reversed. At the same time, the PBOC has been guiding major state-owned banks to restrict their short-term lending to other financial institutions.
Small Caps Have Outperformed Large Caps
DR.CHENJIAZI ZHONG 
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