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Week in review: Shock absorbers

Week in review: Shock absorbers

After Brexit* and Trump, investors have grown used to shocks – especially of the political variety. In any case, it was widely accepted that Italian voters might use Sunday’s referendum to reject the constitutional reforms proposed by its prime minister, Matteo Renzi. So markets took the resounding “No” vote – and Renzi’s resignation – in their stride.

The big worry about the Italian referendum was that “No” would hammer a further nail into the amply studded coffin of the Eurozone. Why? Because Renzi’s resignation could result in an election victory for the populist Five Star Movement, which in turn might lead to a referendum on Italy’s membership of the single currency. And then there was the question of the country’s troubled banks, which were relying on political stability for their recapitalization.

But those fears swiftly gave way to fresh optimism about a rescue package for the banks. The Italian Treasury is reportedly preparing to recapitalize Italy’s oldest bank, Banca Monte dei Paschi de Siena. The 544-year-old bank now looks as unsteady as a newborn fawn, given the amount of bad loans on its books.

Its shares fell at the start of the week, but they rocketed thereafter as hopes of a rescue grew. Its peers followed suit, with Italy’s banking sector on course for its best week in seven years. And given the interconnectedness of the financial system, the Italian revival helped to spur a broader rally across Europe’s banks.

Miners show their mettle

The banking rally contributed to a strong week for financial stocks. Mining stocks performed well too. The UK’s FTSE 100 has plenty of both and finished up 2.98% by Thursday’s close. Wednesday’s hefty mining-led rally was the FTSE’s strongest session since September. It came as the price of iron ore rose sharply, and brokers showered the mining sector with upgrades. U.S. President-elect Donald Trump’s proposed infrastructure spending is still playing a large part in sentiment towards the sector, as investors salivate over just how much steel could be required to build all those bridges.

The “Trump trade” was behind much of the strong performance of global stock markets. In the U.S., the S&P 500 up by 2.48% at Thursday’s close, hitting yet another record high during the week. Industrials and financials have been on a tear recently in the U.S., although technology stocks have trailed. This is because global-facing companies such as Apple have more to fear from Trump’s protectionist posturing than they have to gain from his spending plans.

Taper time

In Europe, the ink had barely dried on Mr. Renzi’s resignation letter when the European Central Bank (ECB) gave investors something else to think about. The Eurozone’s central bank extended its stimulus program by nine months until the end of next year but announced that the level of bond purchases would fall from 80 billion euros ($84.6 billion) a month to 60 billion ($63.4 billion) from April 2017. In other words, the ECB will “taper” its bond purchases. This wasn’t exactly what markets wanted as they look towards a decidedly uncertain 2017. Nevertheless, investors were content to roll with the punches: although bond yields rose, European equity markets appeared to be untroubled by the announcement.

Brexit brawling and burgers

In the UK, the news was dominated, inevitably, by Brexit. UK Prime Minister Theresa May surprised the Commons by seeking its approval of her timetable for triggering Article 50, which was secured with a thumping majority. But will the government still need parliamentary approval to actually pull that trigger, as the high court ruled in November? The government’s appeal was heard by the Supreme Court this week, although the decision is not expected before the New Year. Some brighter news for Brexit Britain was that McDonald’s is planning to move its European headquarters to the UK. Someone, at least, seems to be lovin’ it.

And finally …

“Shooting a video” took on a new meaning this week when the Mannequin Challenge resulted in two arrests (and counting) in Huntsville, Alabama. For those unfamiliar with the challenge that has been sweeping social media since October, it involves a group of people being filmed while standing stock-still. The camera moves around the frozen tableau in a manner that’s been compared to the “bullet time” effect of films like The Matrix.

In Huntsville, 22 men were filmed toting some 19 firearms among them in a Mannequin Challenge uploaded to Facebook. The participants portrayed the aftermath of a shootout, complete with sprawled bodies, pistols and shotguns.

Unfortunately for the film-makers, those guns appear to have been illegally held, and some of the “mannequins” were already known to the law. The police pounced on the property shown in the clip, making two arrests and seizing a considerable quantity of illegal drugs. So, if you’re looking to convert bullet time to doing time in one simple step, you now have an instructional video.

*Brexit is an abbreviation for "British exit," which refers to the June 23, 2016, referendum whereby British citizens voted to exit the European Union.

Important Information

Indices are unmanaged and have been provided for comparison purposes only. No Fees or expenses are reflected. You cannot invest directly in an index.

Companies mentioned in this article are for illustrative purposes only.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.

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