Financial Markets analysis

Wow. Its been an incredible last few months for the financial markets where we have seen all time highs in the US equity indices as stated in my last post due to investors seeking a higher yield for their capital in addition to large capital outflows to the U.S. A variety of reasons include the uncertainty over Europe with regards to a resolution of the sovereign debt situation and the higher unemployment seen in countries within the EU (an example is Greece). Furthermore there has recently been unrest in various other nations (Turkey) which is starting to drain confidence in the EU framework. 

 In terms of a Macro perspective the fundamentals in the U.S are looking more robust where the NFP data has been steadily improving and consumer confidence reaching levels not seen for a number of years due to rising house prices and the 'wealth effect'. The dollar seems like the place to be and this is expected to strengthen substantially over the next 6-12 months. We have also seen incredible moves in the USDJPY currency pair due to 'Abenomics' where the Japanese have injected large sums of liquidity into their financial system to help weaken their currency in order to drive economic growth (making exports cheaper to foreigners) which has the smell of an underlying theme of currency wars.

US Treasuries yields have also risen substantially whilst prices have decreased (the price/yield inverse relationship) due to the rotation of investors out of bonds and into the equities domain. A low interest rate environment has helped as theoretically the price of borrowing is cheap but the likelihood of an increase in interest rates has increased (US fundamentals are more robust and the headline unemployment rate has ticked down) whilst simultaneously there should be a pickup in volatility. This should be over the summer and into the Q3 period as from a historical perspective there is a high probability whist also the German elections will demonstrate uncertainty and that is one element that financial markets have a disliking of.

Global Macro Report Summary

There has been a clear upward trend since the start of the New Year with equity markets rallying to new highs which haven't been seen for the past 5 years. There has also been a renewed confidence with an upwards tick in the ISM data in the U.S and in China in conjunction with the positive numbers seen in the Non Farm Payrolls data whilst simultaneously consumer confidence has really gathered momentum. Therefore we can say that this macro data is supporting the risk on rally even though U.S GDP in Q4 came in significantly low. We will wait to see what the Q1 data brings us to see if there is support for the upward trend. In addition the beginning of Q1 has seen a robust corporate earnings season where investors have been rotating out of bonds (due to the low yields) in to equities for a more attractive rate of return. Furthermore we have started to see JPY weaken significantly against the USD moving well over 1000 pips due to the 'currency wars' theme being played out in the price action. Just now looking for a correction in equities which happened in 2010 and 2011 then waiting for the markets to make new highs. Let's see how the markets unravel!