20160321 – DAILY UPDATE


The equity market rally continues to strengthen and year to date the S&P 500 is now trading in positive territory which is quite impressive all things considered. A month ago some pundits seemed convinced another great recession was beginning. There are key levels that will need to be taken out in order for me to be convinced about the short term sustainability of this rally, not least the reaction highs of December 30th 2015, but that’s not too far away. It is clear that financial conditions are starting to ease again, so it is perhaps not too surprising that some Fed policy makers, notably Bullard are feeling more freedom to express hawkish views. In a speech on Friday he said “Prudent policy suggests edging the policy rate and the balance sheet towards more normal levels”. It’s quite a tight rope monetary officials will have to walk in the United States, as the reason the equity markets are rallying now is largely due to the belief that rate hikes are less likely. In my view the only thing that changes this is if the data in the United States improves. It’s not been that great recently, with sentiment indicators and PMI’s tailing off. We might start to see a rather perverse situation where strong data frightens the markets!


Bullard, wasn’t the only important policy maker talking in recent days. Germany’s Weidmann, a senior ECB policy maker, is widely known to be a sceptic of the extraordinary policies undertaken in recent times by the European Central Bank. He commented, “Monetary policy is not a panacea, doesn’t replace the necessary reforms in individual countries and won’t solve all of Europe’s growth problems.” I have a lot of sympathy for that view, particularly when you consider that Eurozone banks have been unable to deleverage significantly over the last few years, which is a pretty sorry state of affairs to be honest.


In the UK, the resignation of Ian Duncan Smith, a former Tory party leader, from his ministerial job could see an internal civil war amongst the ranks of the Conservative Party. Whether it affects the government’s ability to properly present the case for Britain staying in the EU is an open question and it is clear that the currency markets see it as damaging. The pound is relatively soft this morning.


China’s central bank governor has voiced his concerns at the high corporate debt levels in China, and how this makes the economy more vulnerable to macroeconomic risk. This is something this blog has mentioned a number of times over the past year as one of the bigger risks facing the global economy in 2016 and beyond. Indeed the BIS (Bank for International Settlements) added its voice earlier this month when it suggested that the steep rise in private and corporate debt emerging market economies was “eerily reminiscent” of situation in advanced economies prior to the global financial crisis. It is right to raise this issue, although it is almost impossible to determine at what point, if ever, this over leveraging issue turns into a full blow financial crisis. One thing is certain, the global economy in its current state isn’t strong enough to cope.


That’s quite a lot of stuff going on, and the key question has to be, what does it all mean for the currency markets? Well it seems to me that the dynamic driving positive risk sentiment also means that the dollar is less likely to strengthen significantly in the near term. Surely only a return to strongly positive US economic data is the only scenario where equity markets and the dollar can rally together at the moment? This doesn’t not mean that the bigger picture case for a stronger dollar has been dumped in the trash heap, merely that shorter term dynamics are now more confusing. Data becomes that bit more important to follow.




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