Recent polling of the UK election outcome suggests that the Labour party is edging ahead of the Conservative party and may indeed end up as the largest party. For now the lead appears to be within the margin of error but still, a clear 4 – 5% swing in recent days could be significant. While the US dollar has strengthened in the last 48 hours on the back of Fed minutes suggesting the chances of a June hike are higher than currently discounted, the specific weakness of pound sterling and the fact that it is only slightly above year to date lows (1.4635), while the euro is still some distance away might be taken as a sign by some that concerns about a future Labour coalition are starting to tickle the market.
Recent comments from the US Treasury has brought the strength of the greenback sharply into focus, with that venerable institution raising legitimate concerns about an unbalanced global economy. If Europe, the United States, China and Japan are considered the columns upon which global growth rests, it’s fair to say the United States is the only one lifting a full load at the moment (at least relative to expectations over the last decade). The US Treasury is pushing for Europe to stop relying exclusively on monetary policy. This is an entirely reasonable request… if you view the Eurozone as a discrete politico-economy…. which of course it’s not! More surprisingly the US Treasury has conceded that the Chinese are not manipulating their currency, it’s ironic that the perennial accusation has been dropped even as the superpower rivalry warms up. All of this reinforces a growing concern about US dollar strength going forward…. it will not be welcomed by the US, but as long as other major currencies engage in monetary policies which are considerably easier than that of the Federal Reserve it’s hard to see a different outcome. What it does suggest is that we have seen the end of the really impulsive period of US dollar strengthening, but a persistent appreciation still looks likely. I would just add, finally, that I still remain sceptical about whether the dollar bullish trend has re-started. From here, I still see a not insignificant probability that we see another bout of dollar weakness.
Chinese inflation came in as expected, albeit significantly undershooting government targets, a further sign of the deflationary (or should I, as I would prefer, say disinflationary?) forces sweeping the macro-scope. Indeed if Emerging markets as a whole were a metaphorical fifth column in the example of the preceding paragraph this group would also not be pulling a full load at the moment. There are few reasons to be cheerful about growth right now, but also few reasons to be too gloomy. Certainly if you’re invested in major stock markets outside of the United States, you would have every reason to be uncorking the champagne, with 15 year highs in Japan, record highs in Europe and multi-year highs in China. These are not markets discounting future positive growth, but the evidence of central bank inspired largesse desperately seeking a home. There is little further to report at the moment, in the immediate future, the focus has to remain on the Eurozone, and more specifically Greece. There are hurdles to be cleared, and Grexit is still a possibility. The fate of the euro, the US dollar and global risk sentiment will be heavily influenced by a civilisation that might not have had such prominence for two and a half millennia..
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