The Fireworks Have Been Overseas Lately
January 26, 2015 | Print View
Recently, there have been numerous headlines coming from overseas markets. With the strength of the U.S. markets the last several years we often forget how global the economy and investment markets really are. We need to be aware of news flow around the world, and lately European and Emerging Market headlines have dominated the financial news networks.
In a surprise move, the Swiss National Bank will no longer artificially tie the Swiss franc to the Euro dollar. In the past, the Swiss central bank pegged the exchange rate for the franc at 1.20 francs to the euro. That ended when the Swiss decided to let the market dictate the exchange rate of its currency. The market immediately drove up the price of the franc versus the euro. See the chart below:
The move was dramatic in the relationship between the euro and the franc. When the line is moving lower the Swiss franc is getting stronger and the euro is getting weaker. Moves like this don’t happen very often in the currency markets and it appears the Swiss were getting tired of seeing their currency weaken along with the euro. To companies that reside in Switzerland (think Nestle, Rolex, etc) their products just became about 20% more expensive around the world.
The European Central Bank (ECB) also made a historical decision to deploy its own version of monetary stimulus or Quantitative Easing (QE). The ECB will purchase €60 billion in bonds per month until September of 2016 in order to stimulate Europe’s stagnant economy. See that chart below illustrating weak GDP growth in the Eurozone (EU):
European GDP growth has been hovering around zero the last several years, while U.S. GDP growth has been about 3%.
The plan is to lower interest rates in Europe and stimulate economic growth. The U.S. Federal Reserve just finished its 4 year version of QE, while the Europeans are just getting started. It appears they’re a bit late to the party, but European QE may finally help lift their economy, improve corporate profits for European companies and lift their stock markets.
Meanwhile in Greece, Syriza (the Greek socialist party) swept the recent elections. Syriza has pledged to reverse government spending limits that EU members put on Greece. The fallout from this election could potentially lead to bankruptcy for Greece and its exit from the EU. Fears of a pending exit from the EU are driving up interest rates on Greek bonds, and its stock market has dropped by 20% the last few weeks.
Finally, India and the U.S. are getting friendlier. India has a very large and growing economy that is attractive for U.S. trade and investment. The U.S. is India’s largest trading partner, and we expect this to expand even further after recent meetings between Obama and Narendra Modi (the Prime Minister of India). This bodes well for U.S. companies (like many in the G50) which export goods and services to India. See the chart below highlighting the increasing level of trade between the U.S. and India:
Conclusion:
U.S. investment markets are fairly stable right now, but volatility is on the rise in the global markets. Volatility is not necessarily a bad thing, and can present investment opportunities. Emerging Markets and Europe have lagged U.S. markets the last several years, but this may not (and has not) always been the case. Going forward, international markets may become more attractive than U.S. markets. Investors can gain exposure to international markets with the ETF Endowment Portfolios or with the recently introduced Global Tactical Rotation strategy (GTR).
As of January 23rd, 2015:
Dow Jones US Moderately Conservative Index is up 0.82% (TR) for the year
S&P 500 closed at 2,051.82 (TR)down 0.35% for the year
U.S. 10 year Treasury Futures are yielding 1.81% down 0.36% for the year
WTI Crude Oil futures closed at $45.59 down $8.12 for the year
Gold closed at $1,292 per ounce up $109 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.
