China has been increasingly opening up to the global market. Last year the Renminbi was taken into the currency basket of the International Monetary Fund in October 2016. Now, another step towards liberalisation has followed. China has cleared A-shares for international trade via trading platforms.
“SELL IN MAY AND GO AWAY (BUT REMEMBER TO COME BACK IN SEPTEMBER)”
Who has not heard of the old stock exchange rule “Sell in May and go away” – sometimes complemented by “but remember to come back in September”. We had a closer look at this adage and have analysed the performance on the global stock exchanges over the past 48 years. To this end, we looked at an index that measures exactly that: the company MSCI launched its MSCI World index on 1 January 1970, This is also the start date of our analysis.
Three and a half years after introduction, the Czech National Bank decided today to remove its 27 CZK/EUR currency floor. Many investors were expecting this decision. Indeed, this trade is currently one of the most popular ones among investors. As expected, the Czech koruna appreciated slightly against the Euro. In the short term the currency will remain volatile, as a lot of speculative money is involved. In the long run I expect that the Czech koruna will continue to appreciate given the strong fundamentals of the Czech economy.
On 11 August China devalued its currency by 1.9% relative to the US Dollar and announced that in the future it would expose the exchange rate of the Renminbi to the forces of supply and demand on the foreign exchange market. In a press conference the Central Bank did say, however, that it would continue to intervene if the development of the Chinese currency were “volatile”, “irrational”, or “distorted”.
Commodity prices have fallen drastically since the beginning of July. The commodity price index provided by Bloomberg has fallen by nearly 12%. In fact, many commodity prices are locked in a bear market. The index is currently almost 50% below the level of the beginning of 2011.
Over the same period the currencies of emerging countries have depreciated by about 35% vis-à-vis the US dollar, and equities have fallen by about 26%.
In Turkey, the impact of the currency fluctuations are being discussed and even an ordinary Turk on the street knows what it means for the currency to depreciate. For example, during a cab ride, you may have a very deep economic discussion with the taxi driver about the dollar and the Turkish lira. This is as a result of the crises Turks experienced in the past – unfortunately there was more than one! This in turn, has enabled Turks to have their guard up automatically to cope with the strong dollar and there is a dollar investment mechanism in every household immediately if they get a whiff of the depreciating Turkish lira. Corporates also got used to foreign currency fluctuations, but as an import and export oriented country, the depreciating lira has some negative implications on the corporates as well as economic indicators.
After quite a stable period the Turkish lira has started depreciating against the dollar since the final months of 2014 due to a combination of: i) President Recep Tayyip Erdogan’s comments regarding the Central Bank of Turkey, ii) the ECB’s quantitative easing program, iii) woes about Greece’s exit from the EU and iv) the FED’s rate hike expectations.
The new normal
The importance of China for the global economic and financial system continues to grow at a rapid pace. Last year the country set a new milestone by becoming the world’s biggest economy. The total value of goods and services produced in a year exceeds that of the United States. Thus, at 30% China accounts for the largest contribution to global economic growth.
The most important central bank in the world, i.e. the US Fed, made an announcement yesterday that attracted a large deal of attention from investors. The bank withdrew its assurance to remain “patient” before the Fed funds rate would be increased. This paved the way for a possible abandonment of the zero interest rate policy, if economic need be. The new formula goes like this: the Fed funds rate will be raised once the labour market has improved more and the FOMC is optimistic about inflation rising towards the medium-term target of two percent.
The US dollar has appreciated significantly vis-à-vis the euro in the past months. For this trend to continue, at least two developments would have to be in place. Firstly, the US Fed would have to abandon its zero interest rate policy; and secondly, the ECB would have to remain on its path of negative interest rate policy and bond purchases.
We have seen European equities outperform their American peers in the year to date, both in local currency and in euro. Not even the increase of the US dollar relative to the euro of 8% made a difference to that. What is this pro-European optimism based on? After all, the US economy has seen a significantly better development than the Eurozone. The same is true for US companies, which have been recording profit growth, as opposed to Europe, where profits have generally been falling recently. The uncertainties in Greece and Ukraine only add to this scenario.