The year is coming to a close with the primary stock market indices registering a sideways pattern in recent weeks, aimed at consolidating the positive progress recorded during 2017. In fact, examining the dynamics of the various indices evaluated in local currency to date the trend of the Asian stock exchanges show a growth of 47% for China, 29% for South Korea and 21% for Singapore, in terms of the MSCI index. Followed by the US, with an increase of 19.6%, Japan with 16.1%, on to the European markets that witness an increase of 11.3% for Germany and France, of 15% for Switzerland, 11.5% for Italy and 10.6% for Spain, again in terms of MSCI indices. Asia benefited both from the recovery in foreign investment flows that began in 2016 and from the highly expansionary monetary policy implemented by the People’s Bank of China, the US from the positive economic expectations linked to fiscal stimulus and to the increase in public spending accompanied by a prudent return to monetary stimulus introduced by the FED, while Europe has surprised in terms of economic recovery, thanks to the driving force of the world’s major economic areas, which effectively caused the underestimation of the Euro, albeit in the process of being corrected, and due to the structural reforms implemented after the 2009 crisis. Looking at 2018, the main concern of international investors is the change in the monetary policies of central banks, almost all apparently willing to normalize liquidity by bringing it back to pre-crisis levels. On the other hand, it is likely that the elements that will most influence the dynamics of the securities markets in the New Year will be other aspects. In fact, both the FED, which has just adjusted the rate fluctuation band on the Federal Reserve funds at 1.25 / 1.50%, and the ECB, given that the reference inflation rates are trending at 1.4% and 1.1% respectively, are perfectly aware that structural deflation is far from being reined in, constituting a risk for the prospective holding of the conjunctures, if it were to increase credit tightening. The position of the PBOC is even more convincing, given the current growth rates of domestic liquidity, which could cause Chinese GDP to surprise in terms of growth in 2018.
The Bank of Japan having just tightened credit would seem to confirm the thesis that the same desires to stabilize the exchange rate of the Yen with respect to the Chinese currency and therefore, for the transitive effect, follows the steps of the FED to maintain parity against the dollar. Therefore, the prospective scenarios could include a continuation of strong Asian economic growth, which would drive the Japanese economy resulting in an unexpected weakness in Japanese bonds that would reflect negatively on the global bond sector despite the benign inflationary dynamics. A slight increase in bond yields denominated in Euro, independent of the will expressed by the ECB, would have the positive consequence of allowing a more attractive use for the re-use of the massive liquidity deriving from the repayment of short-term bonds subscribed by investors in the two-year period 2013-2014, but it would represent a valid excuse for the stock exchanges to realize part of the substantial gains accumulated since autumn 2016. This risk seems greater in the USA where the recent flattening of the yield curve and the approval by the Senate of the long-awaited fiscal reform, make more vulnerable indices, which are close to yet another historical high. In the case of European markets, whose indices are far from their highs, except for the Swiss Index, a modest correction would represent a buying opportunity. Over all this scenario hangs the currency issues, which sees the US dollar destined to weaken further especially towards the Euro, less towards the Asian currencies, which are controlled by its central banks. The reason depends on the constant liquidity outflow from the US to Europe and to China, which offer greater potential for economic growth. The sector of raw materials that would be favored by the dollar’s fall and the improved economic outlook, however, is struggling to confirm an upward trend. Furthermore, the oversupply in both the energy sector and the industrial metals sector induced by structural deflation tends to limit its potential for appreciation.
Nicola Bravetti Data Source: Bloomberg