In recent weeks there were lots of interesting advancements in global asset markets. Generally it’s all good news: the dollar is strengthening, platinum is teetering, rates of interest are rising, commodities are resilient, equities are rising, credit spreads are narrowing, and emerging marketplaces are recovering. Not everything is rosy, however, but on balance the market’s message is that global economic growth is likely to improve for the near future, while inflation is likely to stay relatively low and stable. I continue to think that there is a complete lot of upside potential in the U.S.
I that the outlook for corporate earnings is improving now that oil prices are no longer declining and confidence is increasing. What’s changed to make all of this possible? The path of policy: after years or relocating the wrong path, regulatory burdens heading will probably decline ahead, marginal taxes rates will probably decrease, the U.S.
Trump might not do everything right, but as as he fixes at least a couple of things long, we’ll be better off in the future than we’ve been before. The value of the dollar is arguably one of the most crucial financial variables, since it is effectively the price tag on entrance to the world’s biggest, wealthiest, & most influential overall economy.
A rising buck is thus a good indication that the world is more interested in gaining contact with our economy, which subsequently means more investment and more growth-it’s a virtuous cycle. The graph above is probably the best measure of the dollar’s value vis a vis other currencies, since it is computed on a trade-weighted, inflation-adjusted basis. It had been just a few years ago that the money was scraping the bottom of the barrel, trading at all-time lows.
Back then it was far from clear whether the U.S. 2% a 12 months. Today, in contrast, pet spirits are making a comeback. Today’s ADP employment report, which far exceeded expectations, was at least a incomplete sign of the revival in animal spirits. But as the graph above shows, we’ve seen a few spikes like this in prior years quite, only to have them reversed in following months.
In other words, it’s prematurily . to be confident in a substantial and lasting pickup in hiring. Nevertheless, since this report comes on the pumps of a very strong jump in Small Business Optimism (second chart above), it is affordable to be optimistic. History tells us that the worthiness of the buck and the price tag on commodities tend to move in opposite directions (see graph above, which compares item prices to the inverse of the dollar’s value).
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It’s uncommon that item prices should be as strong because they are today given the dollar’s impressive rise lately. I continue steadily to think that this signals a stronger money is a harbinger of the stronger U.S. Credit Default Swap spreads, shown in the chart above, are an extremely liquid market that is an excellent proxy for the market’s view for corporate and business creditworthiness. Swap spreads, shown in the graph above, are a unique form of credit spread because they reveal both the health insurance and the liquidity of the financial markets and they are often good leading indications of the fitness of the economy.
Swap spreads will be the market’s way of charging for common risk when entering into large and complex financial transactions with major financial individuals. That swap spreads both here and in the Eurozone are rising is therefore reasonable to get worried. I hasten to note, however, that U.S. 30 bps, remain within a “normal” range, which would be 20-30 bps. Enough time to be concerned is when swap spreads surpass 50-60 bps. Unfortunately, Eurozone swap spreads are actually in the worry zone. I believe this probably reflects rising concerns in Europe that the French government should exit the EU (i.e., “Frexit”), and if they are doing, this could present significant systemic risk for Eurozone financial markets.
I note in that regard that 5-yr CDS spreads on French federal government bonds have spiked to 60-70 bps lately, while German authorities CDS spreads remain relatively benign. In a nutshell, markets are worried that the French could take action “stupid” that may subsequently lead to defaulting on its obligations. This bears viewing, but it’s not yet grounds to stress.