If the Fed hikes rates next month, history says the US dollar will charge higher

• David Scutt, Business Insider Australia

• 15

Four thousand U.S. dollars are counted out by a banker at a bank in Westminster Thomson Reuters

If the US Federal Reserve hikes interest rates next month — and it looks a good chance despite some of the recent financial market volatility — history says that it will bode well for the US dollar.

As this chart from George Saravelos, a strategist at Deutsche Bank, shows, whenever the US dollar yields rank in the top three of G10 currencies, it almost always heralds a period of strength for the US dollar in the period ahead.

Along with the US dollar, G10 currencies include the euro, the British pound, the Japanese yen, the Swedish krona, the Norwegian krone, the Swiss franc along with the Canadian, Australian and New Zealand dollars.

Saravelos believes that the US dollar is now approaching its “sweet spot” for a late-cycle rally.

“Big dollar moves are less dependent on the change in short-end yields but on the absolute level: whenever the dollar becomes a top-3 G10 high-yielder it rallies as yield-seeking inflows return,” he says.

BI Australia

“A Fed rate hike this December will make the dollar the third highest yielding currency in the world, a strong dollar positive.”

History certainly says it is, almost always kicking-off a prolonged period of US dollar strength in trade-weighted terms.

As the largest component in the broad US dollar index, Saravelos believes this should see the euro head back to parity against the US dollar, and beyond, before the end of next year.

“Our EUR/USD forecasts remain at 1.05 and 95 cents for end-16 and end-17 respectively,” he says.

Writing last week, Robin Brooks, Silvia Ardagna and Michael Cahill, currency strategists at Goldman Sachs, conveyed a similar view to Saravelos, suggesting that an acceleration in inflationary pressures in the United States would see interest rates rise at a far quicker pace than markets currently expect.

The trio forecast that the US dollar will gain a further 7% on a trade-weighted basis over the next three years, powered by five 25 basis point rate hikes from the Fed before the end of 2017.

Read the original article on Business Insider Australia. Copyright 2016. Follow Business Insider Australia on Twitter.

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Bond markets everywhere are getting destroyed

• Jonathan Garber
 

• 5h
• 8,673

Wikimedia Commons

The election of Donald Trump has brought bond market vigilantes out of the woodwork.

US Treasurys raced to solid gains on Election Day when Trump moved ahead in Florida, but heavy selling engulfed the complex as soon as it became clear that Trump was going to be the next US president, with the thought process being that Trump's tax cuts and plans for massive infrastructure spending would finally do the one thing the Federal Reserve has been unable to do: spark the return of inflation.

Sellers remained in control on Thursday, and the market was able to take a breather Friday as it was closed in observance of Veterans Day.

Sellers, however, are back in charge on Monday. Heavy selling across the complex has yields higher by at least 8 basis points. Here is a look at the scoreboard as of 7:15 a.m. ET:

• 2-year +7.3 basis points at 98.8 bps
• 3-year +10.4 bps at 1.27%
• 5-year +11.2 bps at 1.67%
• 7-year +11.5 bps at 2.03%
• 10-year +10.2 bps at 2.25%
• 30-year +9 bps at 3.02%

Several notable developments have taken place amid Monday's destruction. The two-year yield crossed the 1.00% threshold for the first time since January, and the 10-year is also at levels not seen since the beginning of the year. The 30-year yield is above 3.00% and at its highest level since early December.

All of this comes as the Fed prepares for its first interest-rate hike since December 2015. Fed fund futures data compiled by Bloomberg shows an 84% probability of a 25-basis-point rate hike at the Fed's December meeting.

Investing.com

It's not just the US where the bond vigilantes have surfaced. Heavy selling across Europe is having the biggest impact on Greece, where the government continues its efforts to receive debt relief from its creditors. Selling there has the benchmark 10-year yield higher by 19 basis points at 7.22%. In Italy, the 10-year is up 16 basis points at 2.18% as the Italian referendum draws near. On December 4, Italians will vote on whether the country should push ahead with reforms. A "no" vote would lead to the end of Prime Minister Matteo Renzi's career.

Investing.com

And in Asia, Korean yields spiked amid the fallout of the scandal that has engulfed President Park Geun-hye, who admitted to giving classified information to someone without clearance. Heavy selling in South Korea pushed the 10-year yield up 17 basis points to 2.11%. Elsewhere in the region, Japan's 10-year ended higher by 1.7 basis points at -2.2 basis points and is flirting with its first move above zero since February 2015.

Investing.com

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Trump warned Amazon would have 'problems' under his presidency — here's what could happen

• Eugene Kim
 

• Nov. 9, 2016, 2:44 PM
• 369,948
 

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Donald Trump in Nevada.REUTERS/Carlo Allegri

It's fair to say Donald Trump and Amazon CEO Jeff Bezos aren't on the best terms.

Trump has often attacked Bezos for using his Washington Post ownership to keep taxes low on Amazon and keep it free of antitrust allegations. He famously said, "If I become president, oh, do they have problems."

Bezos, meanwhile, called out Trump for his accusations of mainstream media bias, saying he's "eroding our democracy" and suggesting Trump take a trip to space instead.

Now that Trump will become the next US president, Bezos and the companies he owns — Amazon and The Washington Post specifically — may have to brace themselves.

These are the areas that could face increased scrutiny under Trump's presidency:

Taxes

Trump seems to believe that Bezos' ownership of The Washington Post — owned by Bezos himself, not Amazon — is somehow helping Amazon keep its taxes low.

He once called Amazon a "big tax shelter" and suggested Bezos is using The Post's unprofitable business as a means for tax deduction on Amazon. He also said Amazon is getting away with "murder" because Bezos is using The Washington Post's influence to keep politicians away from taxing the company properly.

It's unclear what actions Trump would take to prove his case, but it's not hard to see him threatening to put more pressure on Bezos and Amazon by asking the IRS to increase its scrutiny.

Bezos "bought this paper for practically nothing, and he's using that as a tool for political power, against me and against other people, and I'll tell you what, we can't let him get away with it," Trump said in an interview with Fox News in May.

Amazon paid $273 million in income taxes in 2015. The company historically has had very little profit and only about $14 billion in cash, a small amount compared with other companies of its size.

On the other hand, if anything, Trump's proposed tax policy could help Amazon. Trump plans to lower the business tax rate from 35% to 15%, and cut the tax rate on income held overseas from 35% to 10%.

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Donald J. Trump 

✔@realDonaldTrump

The @washingtonpost loses money (a deduction) and gives owner @JeffBezos power to screw public on low taxation of @Amazon! Big tax shelter

7:18 AM - 7 Dec 2015

 
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Antitrust

Trump once claimed Bezos has a "huge antitrust problem."

"What he's got is a monopoly, and he wants to make sure I don't get in," Trump said in May.

It's true that Amazon controls a big chunk of the online retail and cloud computing market, but making a case for antitrust could prove difficult for Trump.

Antitrust laws clearly state that their main goal is to protect consumers from unfair price hikes because of the lack of competition. But Amazon is all about offering low prices and putting customers first in its business. Amazon also owns a 15% share of total US retail and a 20% share in e-commerce — hardly anywhere near a monopoly.

Amazon could raise prices in the future, but its history suggests that's unlikely. Amazon continuously offers discounts and big sales days, while its cloud service, Amazon Web Services, is the driving force of an industrywide price war, even after offering 52 price cuts so far.

Chip Somodevilla/Getty

The Washington Post

Perhaps Trump's biggest concern seems to be Bezos' ownership of The Washington Post. He seems to believe Bezos exerted influence over the paper's editorial voice to reduce Trump's chances of winning the presidency. In the run-up to the election, The Post broke a number of stories that tainted Trump's image.

Bezos has repeatedly disputed this claim and said he is not involved in the editorial process. He has also criticized Trump for not welcoming more media scrutiny.

"An appropriate thing for a presidential candidate to do is say, 'I am running for the highest office in the world, please scrutinize me,' Bezos said in October. "That's not what we've seen. To try and chill the media and threaten retribution and retaliation, which is what he's done in a number of cases, it just isn't appropriate," Bezos said.

We don't know what Trump would do to The Washington Post, but the publication has a long history as a political watchdog, so this is an area to watch.

Investors

Amazon's stock is down 2.6% as of Wednesday afternoon, but it appears most investors believe Amazon won't be much affected by Trump, largely because it's still growing fast with a lot of long-term growth potential.

Screenshot / CNBC

"The drivers of Amazon's business are broad — secular growth trends in online retail, cloud computing, and media distribution — that it wouldn't seem to me to be at risk unless the government specifically began to regulate those industries with impediments to growth, which seems unlikely," Colin Sebastian, an analyst at Baird Equity Research, told Business Insider.

Neil Doshi, an analyst at Mizuho, also said he remains bullish on Amazon because its market share is "far from displaying monopolistic characteristics," and growth remains strong.

"We remain buyers of Amazon's stock given its growing market share of retail dollars shifting online, strong flywheels around its core business, and continued strength and profitability coming from its AWS cloud segment," Doshi wrote.

Amazon's representative wasn't immediately available for comment.

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

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Report: Trump was unfamiliar with the scope of the president's job when meeting Obama

• Mark Abadi
 

• 44m
• 542

Donald Trump and Barack Obama. Win McNamee/Getty Images

President-elect Donald Trump celebrated his status as a Washington outsider during his campaign for the presidency.

But his lack of familiarity with the US government is coming into view as he transitions to the job in the White House.

During Trump's private meeting with President Barack Obama on Thursday, Trump "seemed surprised" by the scope of the president's responsibilities, according to a report from The Wall Street Journal.

Trump's aides were also apparently unaware that the entire staff of the president working in the White House's West Wing would need to be replaced, according to the Journal.

Obama reportedly will spend more time counseling Trump about the presidency than most presidents do with their successors.

Trump and Obama were highly critical of each other during the campaign season, but appear to have struck a conciliatory tone since Trump's election, at least publicly.

"I want to emphasize to you, Mr. President-elect, that we now are going to want to do everything we can to help you succeed, because if you succeed then the country succeeds," Obama said to Trump in front of reporters on Thursday. Trump called Obama "a very good man" during the session.

Read the Wall Street Journal's full report here.

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Donald Trump's election has Wall Street questioning the future of the Federal Reserve

• Bob Bryan
 

• Nov. 9, 2016, 8:46 AM
• 123,826
 

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Federal Reserve Chair Janet Yellen.Gary Cameron/Reuters

As Wall Street grapples with the election of Donald Trump as the next US president, it appears the order of the day is uncertainty.

Among the myriad uncertain consequences of Trump's election is the real possibility of a major shake-up at the Federal Reserve.

Jefferies economist Sean Darby said that in terms of possible problems for the economy going forward the "main risk is monetary policy uncertainty."

The most striking uncertainty for some analysts is the political independence of the Fed — to not have monetary-policy decisions influenced by ever-shifting political tides has long been a key aspect of the central bank.

Some analysts now say that independence may no longer be assured.

"Ultimately," T. Rowe Price's chief US economist, Alan Levenson, said in a note to clients Tuesday night, Trump's proposals "threaten to undermine global faith in the independence of the Federal Reserve and the geopolitical standing of the United States."

Additionally, some analysts have questioned whether Fed Chair Janet Yellen will remain in her job under the new administration given Trump's pointed criticism of the central bank's policiesand her leadership.

"The future of Janet Yellen's chairmanship and the accommodative nature of Fed monetary policy are in doubt," Edward Mills of FBR Capital Markets said.

Deutsche Bank strategist George Saravelos agreed that the future of Yellen's job was uncertain.

"Even more importantly the market will be looking for confirmation that Chair Yellen will not resign," Saravelos said in a note to clients. "Trump has been particularly critical of her term so policy continuity will be particularly important."

On the other hand, Michael Feroli, an economist at JPMorgan, wrote before the election that Yellen's resignation was unlikely. For one thing, Feroli noted, that there is seemingly no way that Trump could actually fire Yellen.

The economist also said a Federal Reserve chair resigning was unprecedented, but there is another political reason for Yellen to stay on. "Moreover, we don't see a rationale for the apparently Democratic Yellen to give President Trump even more influence over the course of monetary and regulatory policy by immediately stepping down," Feroli wrote. "That said, we doubt she would stay on as Governor even after her term as Chair expires."

In the near term, analysts are also split on whether the Fed will interest raise rates in December. Market probabilities for a rate hike in December have fallen from 84% on Tuesday to as low as 42% overnight, according to Bloomberg data.

On the one hand, the market volatility following the election has convinced some that the Fed will be on hold.

Quentin Fitzsimmons, an international bond manager at T. Rowe Price, said market uncertainty coming out of the election would cause the Fed and other central banks to wait for more clarity before adjusting policy.

"When faced with volatility central banks tend to kick the ball further into the long grass — so they may end and maybe deepen their easing cycles," Fitzsimmons said.

Saravelos agreed that a December rate hike was dead.

"When it comes to monetary policy, in the short term, it looks like a December rate hike is off the table," the strategist said.

David Kelly, the chief global strategist at JPMorgan Funds, said Trump's election at least lowered the chances of a hike. "The uncertainty and volatility following the U.S. election will, for now, reduce the probability of a Federal Reserve rate hike in December," Kelly wrote, "although the Fed will want to leave its options open until it can assess the market and economic fallout from the election result."

On the other hand, others said the strong fundamentals of the economist would keep the Fed on track.

"Unless market volatility weighs on the real economy, particularly jobs, we think the Fed still hikes in December," David Bianco, the chief US equity strategist at Deutsche Bank, said in a note to clients.

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