Currency Market Movements: GBP, Euro, Yen vs. U.S. Dollar
The dollar rally that followed the U.S. election is over, creating a headache for European and Japanese exporters and stock markets. However, it is unlikely that either county’s central bank will push back aggressively given the risk of a protectionist retaliation by the U.S. administration. The path of least resistance looks to be a weaker dollar.
Asset Class Returns Since March 2009
Since the lows of the global financial crisis in March 2009, U.S. stocks have nearly outpaced every other major market over that period. However, extended outperformance cycles are typically followed by underperformance cycles (and vice versa). So, who’s up next? We believe a number of diversifying assets now appear poised for outperformance going forward.
Eurozone Economic Indicators: Growth Expectations vs. Retail Sales
Rising retail sales and growth expectations indicate greater economic growth potential. This view chimes with our recent Cyclical Outlook, in which we anticipated that the eurozone economy would grow by an above-consensus 2% in 2018. A key risk for the outlook is the Italian elections early next year, however.
Historical Bond Market Movements: 10-Year Sovereigns
As detailed in our August Asset Allocation Update, we find U.S. interest rate exposure the most attractive. If the global economy faces a negative shock, there is more scope for U.S. yields to fall (and prices to rise) than there is elsewhere. U.S. bonds may therefore be a better source of diversification in the current environment. Beyond the U.S., we find UK gilts and Japanese government bonds rich, and believe valuations of eurozone peripheral bonds are suspect without continued ECB support.
Total Assets of the U.S. Federal Reserve
Last week, the Fed formally announced plans to start reducing its balance sheet. Caps will be placed on the maximum dollar amount of U.S. Treasuries and mortgage-backed securities (MBS) that will be allowed to roll off each month. At first these caps will be set at $4 billion for MBS and $6 billion for Treasuries, and will be raised quarterly until they reach $20 billion and $30 billion, respectively, one year from now. Still to be decided, however, is the ultimate destination for the balance sheet.
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