USA
In the United States, there are two key elements currently influencing the financial market at the moment:
1. Interest Rates
We have strong reasons to believe that the interest rates will increase as early as March. The US economy is performing very well and this is reflected in the rise in inflation. This creates practically ideal conditions for interest rates to increase, which is supposed to protect US economy from overheating and therefore, to diminish the risk of a more pronounced phase of economic recession, which will inevitably follow the current phase of economic expansion as part of natural business cycle.
2. Fiscal Stimulating
“Yellen said she did not want to weigh in on specific tax and spending proposals, but she urged policymakers to consider the importance of making US businesses more efficient, which economists believe is essential to raising living standards over the long term”. Fiscal stimulating has both an upside and a downside. The upside is the ability to deliver a kick to the economy at a time when the economy needs it most.
The disadvantage of fiscal stimulating is the risk of making businesses in a country less efficient, resulting in the demotivation of zombie companies to renovate, or to free space for new potentially more successful companies. In other words, it is much better to allow the businesses that are too weak and inefficient to gradually die (resulting in more free space for newer and more efficient businesses), rather than to keep throwing money at them. Another downside of fiscal stimulating is the debt increase. To decrease 1% of 'Debt to GDP' costs 1% (the same amount) of GDP growth, therefore fiscal stimulating is itself a form of an investment which is sometimes wise and sometimes not.
Fiscal stimulating is not a bad thing, nevertheless, it must be used wisely; to the right extent, timing and manner, if it is beneficial at all at the time. Fiscal stimulating is supposed to be a tool for balancing the economy, rather than a life support machine for brain dead businesses.
In fact, we are convinced that even interest rate levels have an impact on the efficiency of businesses in the long run, as we believe relatively lower interest rates (cheaper money) tend to create quantity over quality in terms of businesses. Whereas, relatively higher interest rates (more expensive money) tend to raise the quality of businesses in a country.
After all, generally higher interest rates motivate people to save more money:
- they will need more of their own capital to increase their likelihood to secure a business loan,
saving is safer, as an appropriately tighter monetary policy ensures that savers will not lose part of the value of their savings.
We believe that the more someone is investing their own money into his/her business, the more vigilant and thoughtful the decisions he/she will tend to make, which is reflected in his/her business accordingly. As you may assume, we are now very positive regarding both the US economy and the anticipated monetary and fiscal policy intentions of the FED.
We refrained from mentioning president Trump, as we believe he is not going to push forward with some of his ideas in the foreseeable future.
United Kingdom
We believe that the biggest threat to the UK economy is the risk of hyperinflation. Prices started increasing parabolically, while wage growth is relatively subdued. This can force companies to start increasing prices even more, in order to compensate for price increases already in place, which in turn, causes inflation to increase even more…
This vicious circle of hyperinflation can cause further capital outflow from the country, as British money managers may start selling UK equities and invest in foreign securities instead, in order to make the profit needed to please their customers while gaining their performance fees.
It is rather late for increasing interest rates to keep the value of the sterling at a reasonable level, as the impact would not be significant at this time. Also, high interest rates could weaken British companies which may be facing challenges in the near future.
Neither monetary nor fiscal policy seems to provide a solution at this time. Nevertheless, there is always a solution, and there is always something else which could be done.
We believe the main factor which will determine how much the rate of inflation or even hyperinflation in the UK will be the speed of Brexit negotiation.
The sooner the Brexit negotiations are completed, the better it will be for the UK economy, as the period of increased uncertainty is more damaging than facing the final result - whatever it is.
The completion of Brexit doesn't need to be a big deal, as the UK can copy Switzerland’s model, which was suggested by the EU, after all. This seems to be the most logical and effective solution.
The EU
The economy seems to be maintaining a reasonable pace of its expansion and is quite healthy. However, there are two geopolitical risks in the EU:
1. Brexit
The UK has been suggested to follow Switzerland’s example, as it is the most logical solution to solve the issues quickly and effectively, with minimal space for potential argument or disagreement. Brexit will probably not be a great deal for the EU, nevertheless it has been creating uncertainty, which has not been beneficial for either the EU or the UK. However, it is likely that the issue will be dealt with very soon.
2. French presidental race
Should Marine Le Pen win the elections, then the future of the EU could be in question. Nevertheless, the entire matter doesn't benefit the EU as it creates uncertainty, which never seems to benefit anything. We don't expect Marine Le Pen to win, because the French voters are likely to be more concerned by the increasing troubles the UK is experiencing as a consequence of the Brexit vote. In fact, the defeat of Marine Le Pen, which we believe is likely, could strengthen the EU.
Japan
Although the last value of the trade balance ticked down, we are still monitoring whether the relatively recent improvement in the Japanese trade balance signals the beginning of a long term trend, or just medium term improvement - which we see as the key parameter in evaluating what may happen to the Japanese economy in the future.
No changes to the monetary policy in Japan are expected. However, the USD/JPY has been appreciating lately as investors are seeking to buy safe haven assets due to the increased geopolitical uncertainty. If the yen becomes too strong - which doesn't seem to be the case yet - it can have an adverse effect on export.
Australia
Although the economic data have been mixed, as is the usual case in any country, we have reason to believe Australian economy is performing well:
The Australian trade balance has improved rather dramatically over the last year. The improvement was down to the rise in export rather than a decrease in import, which is very positive.
Although the last employment data has been mixed - unemployment ticked down to 5.7% (from 5.8%) while full time unemployment ticked up, as 44.8k jobs have been lost (therefore, improvement in overall unemployment was down to part time jobs), we don't think Australia is facing a rise in unemployment, as job advertisements have been at a 5-year high for the same month (January).
Business data has also been mixed. Manufacturing PMI ticked down to 51.2 (from 55.4) and also service PMI ticked down to 54.5 (from 57.7). However, both of these changing values were a one off - for over 6 months theses values have grown continuously, and both values remain in the range indicating economic growth (above 50). After all, the business confidence has increased to a 2-year high, as it ticked up dramatically to 10 (from 6) in the same month (January) and therefore, we are enthusiastic regarding Australian business.
The price of the gold is rising, which is beneficial for Australia.
The level of consumer confidence improved in February.
The Bank of Australia seems to be optimistic. Therefore, we don't think there is some hidden negative surprise waiting.
New Zealand
The combination of increased unemployment to 5.2% (from 4.9% over one quarter), along with the decrease in the value of manufacturing PMI to 51.6 (from 54.2) and the sluggish dairy prices, create the impression that New Zealand’s economy might be in some trouble, which is moving the New Zealand Dollar down. Nevertheless, we have reason to believe that this perception could be rather distorted, and the New Zealand economy is in better condition than it appears or is reflected by the market at the moment:
Although unemployment ticked up to 5.2% (from 4.9% over one quarter), the increase has not been down to losing jobs, as the number of employed persons increased to 2510k (from 2494). However, the number of unemployed persons increased to 139k (from 128k), and the increase in overall unemployment must be down to the changes in the structure of the population (the number of people in the productive age has increased). Therefore, we cannot consider the increase in overall unemployment as sign of an under-performing economy.
The decrease in manufacturing PMI has been also been experienced by neighboring Australia. Nevertheless, the Australian business confidence increased simultaneously and significantly, which we expect will also happen to New Zealand, once the value will be published.
We would not worry at all regarding the fluctuation in dairy prices, as there is no long-term trend which would indicate that dairy products are becoming cheaper.
New Zealand has a strong and increasing GDP (3.5% annually, 1.1 increase over the last quarter) which doesn't seem to have been jeopardized by the recent inflation.
It is definitely worth mentioning that New Zealand has managed to decrease their Government Debt to GDP to 24.6% from 25.1% in the year 2016, which indicates that New Zealand economy is not only performing well, but is also highly sustainable.
Canada
Although the GDP level has not yet reached an overly impressive level, we are convinced the Canadian economy is picking up again, and is now in the early stages of a long-term trend of healthy economic growth. Although, the data may look rather ambiguous at this stage. Let's wait to see more evidence.
We are slightly bullish on AUD, CAD, NZD, Gold, Silver and Oil
We are slightly bearish on EUR, SPX500 and Copper
We are bearish on: GBP