Market Overview – Australia’s Recent Finance and Retail Activity

Recent financial developments in Australia have signalled overall positive growth in several sectors, including areas of technology and finance, while in the retail sector recent announcements may have negative impacts on national businesses in the short term.

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A recent dip in interest rates has eased up mortgage stress, with the number of mortgage holders in Australia considered “at risk”, dropping by 1.6% in the last year, from 744,000 to 660,000, making up 16.8% of all mortgage holders compared to the previous 18.4%. While this is a move in the right direction, those with lower incomes are still at a higher mortgage risk. Of mortgage holders with a household income over $100,000 per annum only 1% were considered to be “at risk” while this jumped to 85.3% of mortgage holders with an income of under $60,000. If interest rates continue in this downward trend fewer mortgage holders may be considered “at risk” however, an appreciation in interest rates will abruptly have the opposite affect.

The Australian state of Victoria is experiencing changes in another area of the financial sector with the release of development plans by the Victorian government, announcing the establishment of a fintech center in Melbourne. According to the Victorian Premier Daniel Andrews the hope is that this will not only strengthen the Australian fintech sector by bringing together start-up companies with investors, researchers, and industry corporates in one work space, but that it will also create new jobs in the area. Technology is fast changing the way the financial sector works and the plans for this fintech hub will provide Victoria with the opportunity to win a bigger share of the industry.

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While developments with in the financial technology sector are positive, Amazon’s announcement of their $13.7 million bid for the grocery company Whole Foods has had a drastic effect on Australia’s retail sector. Supermarket company Woolworths experienced a drop in value of 3% while Metcash fell 1.7% and Wesfarmers, the operators of the supermarket chain Coles, dropped by 1% following the announcement. Companies in the electronic appliance field have also noticed depreciations as Amazon announced their bid to expand into the grocery sector. JB Hi-Fi is down 18% this year while Harvey Norman dropped 25%, and its stocks are down by 2%. Alongside the acquisition of Whole Foods, these drops are fuelled by Amazon’s intention to expand across Australia this year. Many analysts believe that this will have further negative effects on Australian companies, as Amazon eats into their earnings.

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(Please note: James O’Leary does not currently hold a position in Amazon, Whole Foods, Woolworths, Metcash, Wesfarmers, Coles, JB Hi-FI, or Harvey Norman. Henry James International does not currently own a position in Amazon, Whole Foods, Woolworths, Metcash, Wesfarmers, Coles, JB Hi-FI, or Harvey Norman. for any client portfolios).

Post-Election Economic Activity

The results of the UK general election on June 8th have left many factors in a state of uncertainty in Britain. The country has been left with a hung parliament, with the Conservatives only securing 318 seats of the 326 they needed to win a majority. This political result has had effects, both positive and negative, on areas of the economy and investment markets.

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Previous trends have shown that, when there is anticipated disturbance in the political sector, investments in commodities such as gold increase as people try to hedge their bets against economic losses. In the run up to the election, there was increase of 64% in people investing in gold for the first time, while numbers of financial professionals buying physical gold were up 49% in the week leading up to the vote.

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Following the announcement of a narrow Conservative win the sterling experienced a sudden drop of 2% in value against the dollar to $1.2683, its lowest level in two months though it regained a little ground back up to $1.27 on Friday the 9th. It is predicted that sterling will continue to experience some level of volatility in the short term.

While the election results have hit some areas of the economy negatively, others are thriving after the news. The FTSE 100 ended on the 8th of June up 1%, while the Stoxx Europe 600 experienced an increase of 0.3%. Global businesses, such as Diageo, Reckitt Benkiser, and Unilever also observed upward movement, all trading at around 1.5% higher by the 9th. Increased value of shares of exporting companies, which make up three quarters of the FTSE 100, are expected to do better as the weakened currency is likely to rise income earned abroad.

The narrowness of the Conservative win will have an impact on how the upcoming Brexit negotiations are carried out as well. Theresa May gambled the Conservative status as the ruling party in the hope of gaining an even stronger position in the negotiations however, this has backfired with no party having an overall majority in the UK parliament. The weakened Conservative position means that a more lenient Brexit deal may be agreed on as opposed to the “hard” Brexit that May hoped for, with no trade deal.

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As the Conservative party enters into discussions with the Democratic Unionist Party (DUP) about a possible coalition, economic uncertainty may continue. This coalition would see the DUP adding their 10 parliamentary seats to the Conservative seats, giving the party the majority it needs to pass legislation, and gain a stronger hold over the Brexit negotiations.

The Rise and Fall of the Metal Market

Many investors look at gold as a safe bet, an insurance policy for times when other stocks are less certain. In this year an ounce of gold has increased in value by almost 13%, to $1,296. There are two schools of thought about why the commodity has experienced such a high level of growth after having been uneasy in the first part of this year. The first is that this increase comes off the back of political unrest. As political tensions grow both in the US, with continuing problems among the Trump administration, and in the UK, with the recent attacks as well as the general election, some believe that these could begin to affect the economy, and upend corporate profit growth. Gold is a stable way for investors to hedge their bets against this possibility.

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Another idea is that, rather than gold prices being increased as a result of politics, the rise could be linked more to the state of the economy and monetary policy. The US dollar is currently near a seven-month low compared to other world currencies and it has been observed on several past occasions that as the dollar falters the price of gold rises. Others believe that recent rise and fall in gold price is seasonal, with Frank Holmes, CEO and Chief Investment Officer of US Global Investors saying that there is a 60-70 % chance that the price of gold will experience a general upward trend between June 2017 and January of next year.

While gold may be a safe bet in its current state there are also other metal commodities worth following. As the demand for electric vehicles continues to grow, so will the demand for both lithium for batteries and copper for wiring, making these possible safe and lucrative investment options.

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The auto industry is also responsible for an upward trend in the price of palladium, a crucial component of catalytic converters. After having sunk to $657.50 per ounce in December 2016 the precious metal has risen by 24% in 2017 to a current price of $856.60. However, while it has regained its ground having been near a seven-year low since January, there are concerns that palladium may not be able to maintain this as there is a slowing in car sales in the US, Europe, and China. In the US car sales fell again in May, contributing to a consecutive five month decline, while in the EU, although sales rose by 4.7% in the first four months of 2017, they then dropped by 6.6% in April. Other countries have, however, experienced continued growth in auto sales, such as Canada whose sales increased by 11% in May. The result is divided opinion on the future of palladium, with some believing that it has reached its peak and others of the opinion that it will hold its ground and possibly even continue to appreciate in price.

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The Rise of Artificial Intelligence

Manifestations of artificial intelligence (AI) stretch back as far as Greek mythology however, it has only taken off in a huge way in recent years. As interest in this field grows more, big-name companies, such as Google, Yahoo, Apple, Intel, and IBM are competing to acquire private AI technology development companies, with nearly 140 companies having been acquired already. Market research firm Tractica has predicted that spending on AI will grow from $640 million in 2016 to $37 billion by 2025.

A front runner in the development of AI has been the UK, where London-based venture capital company Octopus Ventures first invested in the natural knowledge answer engine Evi (now the technology behind Amazon’s Echo) in 2008. The firm continues to be an active investor in AI, selling products, such as the app Swiftkey, to high profile companies like Microsoft. Octopus Venture’s Investment Director, Luke Hakes, believes that their AI successes are why the UK is now the inspiration for other countries in how AI can be commercialised, and this growing interest will have the effect of more funding being put into AI companies.

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As well as seeing the AI market itself grow exponentially, other companies are experiencing growth off the back of AI’s success. Companies who develop and make chip technology have seen a revival as the demand for new AI products had prompted the need for chips tuned to carry out very specific functions, and with the ability to store and synthesise information in novel ways. Companies such as Advanced Micro Devices, Intel, and Nvidia have all benefited from this growth, with Nvidia’s latest quarterly results stating that it has nearly tripled sales of chips to data centers involved in AI. 21% of the company’s revenue is now from computing tasks that include AI, amounting to $409 million for the last quarter.

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Growth in this sector is being spurred on as well-established companies implement AI technologies to enhance their user experience. Facebook has developed its own AI program, DeepText, that analyses posts to understand the context of them, recognises faces in photos to make it quicker to tag people, and is even able to identify people and their voices in video content. Outside of the online sector, much research is being carried out into the use of AI in the transport field. By 2035 around 76 million vehicles with some level of autonomy will be in use, comprising a market that will be worth $77 billion.

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Although much of the development into these technologies is relatively new, investment in AI seems to be strong and stable, with a predicted steady increase in the future.

(Please note: James O’Leary does not currently hold a position in Google, Twitter, Intel, IBM, Advanced Micro Devices or Nvidia. Henry James International does not currently own a position in Google, Twitter, Intel, IBM, Advanced Micro Devices or Nvidia for any client portfolios. James O’Leary does currently hold a position in Apple. Henry James International does currently own a position in Apple).

pixaAll content in this blog represents the opinion of James O’Leary

Surge of the Social Media Sector

With the rise of a generation that spends a large portion on its time online, it is no wonder that many social media companies are experiencing significant growth. Furthermore, that the status of longer-established platforms are being threatened as new platforms are developed.

Following a multi-year fall, Twitter shares are up 26% in the last month. This unexpected growth has been accredited to deals that Twitter has made with media companies to stream video content from the Twitter app. These deals include the rights to stream various National Football League (NFL) content, though not the 10 Thursday Night NFL games it had the rights to last year, and which it missed out on this year to Amazon. As these deals come into play it awaits to be seen if Twitter can maintain this recent growth or if it will return to the recent pattern of decline.

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The long-standing social media platform, Facebook, has managed to maintain its high-ranking position, even as other social medias are developed that could rival it. The network, which has 1.86 billion monthly users, and also owns big-name platforms Instagram and WhatsApp, has seen its stocks grow by 25% over the past 12 months. Although Facebook has seen a slight slowing down in advertising recently, it still holds the position as the second largest display ad company in the world, after Alphabet’s Google. Analysts estimate yearly growth of 37% and 28% in revenue and earnings respectively as the company introduces new advertising products, increases its use of video advertising and increases user numbers.

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Another platform which can attribute its recent growth, in part, to advertising revenue and the development of new video hosting technologies is the Chinese social network Weibo. With annual growth of 43% annually to $212 million last quarter and monthly active users (MAU) increasing by 33% to 313 million the microblogging network is growing rapidly. Wall Street analysts predict that this year Weibo will see a revenue increase of 51% and that its non-GAAP earnings with rise by 62%.

A proliferation of dating sites have sprung up in recent year and platforms such as Tinder, Match.com, OKCupid, and PlentyOfFish are all under the umbrella of Match Group. In the last quarter this company saw 92% of its revenue come from Match.com and Tinder, which now has over 50 million users. While often these platforms are free, Match Group has managed to increase revenue by creating premium options, where users can pay for extra features. Last quarter paid member count rose to 5.7 million network-wide, an annual increase of 23%. This boosted total revenue by 20% and increased earnings by 21%.

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While the outlook of these companies is overall positive in the short term, maintained growth is not a sure thing. As competition in the social media sector increases companies will have to continue to develop and innovate in order to stay relevant and experience positive growth.

(Please note: James O’Leary does not currently hold a position in Twitter or Match Group. Henry James International does not currently own a position in Twitter or Match Group for any client portfolios. James O’Leary does currently hold a position in Facebook and Weibo. Henry James International does not currently own a position in Facebook and Weibo).).

All content in this blog represents the opinion of James O’Leary

Digital Developments – The Wearable Technology Market

Developments in the digital era have meant that it is easier than ever before to take your work with you. Phones now serve not only for making calls but also as devices for sending emails, keeping up-to-date with world news, and keeping track of to-do lists and calendar engagements. One digital sector that has seen growing interest recently is that of wearable technology. Wearable tech has been around in one form or another for centuries, but a boom in popularity began in the 2000s when companies began developing devices that took keeping fit on the go to a whole new level. Since then the wearable technology sector has taken off, with the number of wearable tech devices being shipped increasing from 29 million units in 2015 to 33.9 million units in 2016, growth of 16.9% year-on-year.

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Having launched their first product in 2008, a fitness tracker wristband, Fitbit initially experienced high levels of commercial success. However, recent figures show that the company may now be in a period of declining consumer interest. Shipments in the 4th quarter of 2016 were down 22.7% compared to the same period of 2015, with numbers dropping from 8.4 million units to 6.5 million. In terms of market-wide success, in the first quarter of 2017 Fitbit accounted for 13.2% of all wearable technologies shipped, in comparison to the 24.7% of the market that it made up a year ago. It is thought that the drop in Fitbit products may be due to a reducing demand for fitness bands and the company’s slow entry into the market for smartwatches. However, CEO of the company, James Park, believes that as the market for wearable technology develops, new opportunities for renewed growth of Fitbit will present themselves.

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As Fitbit sales decrease, the way has cleared for other big-name tech companies to take a larger portion of the market. With the launch of the new Apple Watch series 2 in September 2016, Apple has seen an increase in sales from 4.1 million to 4.6 million, a growth of 13%. The company has overtaken Fitbit as number one in the wearables market in the first quarter of this year. Close behind Apple, Chinese technology company Xiaomi has also overtaken Fitbit to second place in the market. Indeed the company has been the fastest growing in the industry, experiencing a year-on-year increase of 96.2% in sales, from 2.6 million to 5.2 million from 2015 to 2016. Much of this growth was due to shipments of their tracker, Mi Band Plus.

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While Fitbit may be experiencing a period of declining interest, the wearable technology market as a whole is bigger than ever, and with new products constantly being developed and introduced it is likely that interest in this sector will continue to grow.

(Please note: James O’Leary does not currently hold a position in Fitbit, Apple, or Xiaomi. Henry James International does not currently own a position in Firbit, Apple, or Xiaomi for any client portfolios)

Economic Activity in the First Quarter and the Results of the International Select Portfolio

With the first quarter of 2017 over, we are reviewing the progress of our International Select portfolio. Over the past ten years (ending 3/31/2017) North American markets have seen an average of over 7% a year, while the MSCI EAFE has averaged only 1.53% per annum. Furthermore, over the past year, also ending 3/31/2017, the North American markets have increased by 17.34% with MSCI EAFE only rising by a little over 12.25%. Despite these differences between North American and European, Australasian, and Far Eastern markets, we believe that non-US markets will become market leaders over the coming few years. The outlook for the global economy is affected by Trump’s presidency, and the effect of this on US GDP growth rate back up to 3% per year. If this level of growth can be met, it should ensure long-term, positive effects on a global scale.

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In terms of the International Select portfolio, it has returned 9.75% pure gross, and 9.28% net while the MSCI EAFE Index has seen returns of 7.39%. Several factors have influenced the performance of this portfolio. Stock selection and country weightings in Switzerland, France, Belgium, the UK, and China have all proved beneficial, while the same processes in Canada, India, Norway, the Netherlands, and Panama have had hindering effects. Other factors that aided the portfolio’s return were positions in technology services, electronic technology, health technology, energy minerals, and retail trade. Hurting performance were positions in producer manufacturing, consumer non-durables, and transportation. However, portfolio activity was primarily in an upward direction, trailing one-year (ending 31/3/2017) and returning 19.21% pure gross, and 16.38% net versus the 12.25% result of the MSCI EAFE.

In terms of global growth, The US has been an influential presence and, on the political scene, populism has arrived in the UK, Italy, and various other nations. The hope is that the best characteristics of this doctrine will combine with proven economic activities, resulting in the resumption of global economic growth. This growth will hopefully occur in several sectors, including a period of rising GDP, corporate earnings growth, and a rising tide for economies in general. If this comes to fruition, it may open the door for non-US markets to come to the fore, where, up to the present, their currencies have underperformed the US dollar. In an environment of stronger non-US markets, the International Select portfolio, with a strategy of high-conviction, low-turnover which blends both quantitative and fundamental-based analysis, should thrive.

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Positive Developments in the Biotechnology Market

*All content in this biotechnology blog represents the opinion of James O’Leary*

In recent weeks the biotechnology market has seen great changes, with the development of new medicines and medical software. The outcome has been an increase in interest in various companies and, by extension, an increase in the stock prices of these companies.

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A large market is developing for drugs that fight cancer through using the body’s own immune system. Incyte has developed a medicine, called Epacadostat, which does that and which has caused quite a stir among investors and some of the biggest drug makers in the world. The exciting development of this new drug has resulted in Incyte shares increasing in value by 76% in the last year, while revenue has jumped from just $1.1 billion to $28 billion in the same time period. In 2017 alone Incyte stock has increased 36% in value, making it one of the S&P 500 best performers of 2017 within the drug sector.

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(Please note: James O’Leary does not currently hold a position in Incyte. Henry James International does not currently own a position in Incyte for any client portfolios).

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Also making recent waves in biotech news is Invitae who have announced that they are launching a platform on which patients will be able to anonymously upload their genetic information, initially focusing on the information of cancer-related patients. The idea behind the development of this database is that more readily available data will allow developers to make bigger advancements towards important medical discoveries. Following the announcement of this new platform, Invitae’s shares increased in price by 2.79%, closing on the 6th at $11.05, while year-to-date the company stock has experienced a gradual rise of 39.17%.

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(Please note: James O’Leary does not currently hold a position in Invitae. Henry James International does not currently own a position in Invitae for any client portfolios).

Neurocrine Biosciences

The first product for treating the movement disorder Tardive Dyskinesia (TD) in adults has been developed by the company Neurocrine Biosciences. The announcement that the drug, Ingrezza, has been FDA approved was followed by a sudden 22% jump in Neurocrine stock prices, which closed at 24% on Wednesday 12th. At close on the same day Neurocrine’s shares were up 33% on a year-to-date basis.

(Please note: James O’Leary does not currently hold a position in Neurocrine Biosciences. Henry James International does not currently own a position in Neurocrine Biosciences for any client portfolios).

Other News in the Biotechnology Sector

Similar increases in other biotechnology companies have also been observed, according to Barrons, with iShares Nasdaq Biotechnology (IBB) shares having climbed 0.34%, Vertex Pharmaceuticals (VRTX) lifting 2.42% to $177, and Healthcare stocks increasing by 0.24%. Three companies in the biotech sector that investors should keep an eye on are Biogen (BIIB), Alexion (ALXN) and Gilead (GILD). Biotech Research Analyst Alethia Young from Credit Suisse has estimated that BIIB will report earnings per share (EPS) of $5.14 instead of the $5.02 that the consensus predicts, while revenue will be $2.79 billion rather than the average estimate of $2.75 billion. Likewise Young believes that EPS and revenue for GILD will be higher than consensus estimates, with $2.46 instead of $2.28, and $6.94 billion over $6.6 billion respectively. As for ALXN, it is predicted that it will meet expectations throughout the year, if not slightly exceed them.

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Several biotechnology companies have seen increases in stock value as they have announced new developments and, according to Christopher Raymond, Senior Biotech Analyst and Managing Director of Raymond James, the commercial outlook for biotechnology is on the whole positive for 2017.

(Please note: James O’Leary does not currently hold a position in any of the companies mentioned above. Henry James International does not currently own a position in any of the aforementioned companies for any client portfolios).

The EU Markets Relief Rally

The first round in the French presidential election was held on the 23rd, with Emmanuel Macron and Marine Le Pen coming out in front, winning 24% and 21.% of the votes respectively. Le Pen is a right-wing candidate from the National Front party who is opposed to the euro and France’s place in the European Union. On the opposite side, Macron, who is currently leading in the polls, is a former investment banker who left the socialist party to found a centrist political party, En Marche!, and supports gobalization and a stronger European economic union.

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European markets have seen some dramatic changes in the wake of this first electoral stage. Following Macron’s victory France’s CAC 40 index increased by more that 4%, reaching a nine year high. Germany’s DAX, an index consisting of the 30 major German companies, had climbed by 3.3% by the time the markets had closed, while the FTSE 100 in London rose to 7,264, recovering by 2.1% after a drop last week following the announcement of the UK general election.

The euro was also positively affected by the results, jumping a huge 1.5% to a value of $1.09. This increase has meant that the shares of European banks have risen to their highest level since December 2015. French bank, Credit Agricole, saw share prices rise by 10.86% while Barclays in the UK was up 5.4%. However, it is believed by many experts that the substantial increase in euro value, a five-and-a-half-month high against the dollar, may be no more than a one-day wonder, with currency analyst at MUFG Lee Hardman saying, “Now that the initial adjustment higher has taken place, we do not expect the French elections to have much further impact on the euro in the near-term.” While the euro had a good day sterling had its worst day against it since October last year, down 1.3% following the election results.

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The effects of the election have been felt outside of the EU as well. Asian markets are experiencing a second day of gains, having reacted quickly to the result of the weekend. The Japanese index Nikkei 225 was up 0.4% on the morning of the 24th, while the Kospi index had increased in value by 0.1%. Closer to home, all three main US share markets have increased more than 1%, with the Nasdaq index reaching a record high, having appreciated by 1.2%, when markets closed on Monday 24th.

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After the unexpected results of the Brexit vote and the election of Donald Trump it is unwise for people to take for granted the fact that Macron will win the second round of the election on the 7th May. Nonetheless, recent polls have shown that he is the firm favourite to win, a result which would guarantee France remains a member of the European Union.

Market Overview: Asia

This week we are focusing on activity in Asian markets. We will be highlighting changes in Singapore, and China, as well as looking at the impact of the recent missile strike in Syria on Asian markets, and stock prices further afield. The attack had some immediate effects on markets, however, most stocks seem to have re-stabilized.

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Singapore

It has been announced that the Singaporean government will increase spending on public infrastructure from SGD18.3 million to SGD30 million by 2020. This comes as they fell in the rankings of the World Economic Forum’s Global Competitiveness Report from number 2 (2012-2013) to number 5 (2014-2015). Projects will be carried out in the areas of land transport, air and sea transport, utilities, and healthcare with planned building of four new state hospitals between 2020 and 2030.

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China

In the week ending April 2nd property prices rose 27% from the same time last year in 26 major Chinese cities. Leading this increase were Shanghai, with a rise of 72%, and Guangzhou with a rise of 77%. Moreover, 17 major property developers saw sales growth of 82% in March, similar to that of 91% in the January-February period (Source: Barrons).

The Effect of Air Strikes on the Markets

Last week saw the US fire dozens of missiles at a Syrian airfield, damaging infrastructure including the runway. The strike was carried out in retaliation to a chemical attack that occurred in a rebel-held area of Syria earlier. Several stocks have experienced increases and decreases as a result of the strike. US futures fell, with S&P 500 futures off 5 points and Dow Jones futures down by 44 points. Asian shares also experienced an initial drop before re-stabilizing.

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However, not all markets saw drops. The Yen saw an increase against the Dollar, and commodities such as gold and oil saw a rise in prices. London spot gold prices were 1.3% higher recently while Brent crude futures rose more than 2% before levelling to a gain of 1.42% at $55.67 per barrel. US crude increased by 1.61% taking it to $52.53. The reason for increases in the prices of these goods is because investors switched over to them, moving out of riskier investments. In the case of oil the price rose due to investors’ concerns that supply might be disrupted by the military in the region. However, despite these fears, CNBC says that it is unlikely that oil supplies will be restricted by Syrian military forces as it would be equally disadvantageous for them.