With the holiday season fading into the distance and auditors busily calculating final portfolio returns for the year past, it’s business as usual for global financial markets. The biggest risk factor on many investors’ minds as the new year begins — looming larger even than the selloff in oil markets — is the euro. After reaching the lowest level versus the dollar since the spring of 2006 over the weekend, the unified currency appears poised for a further slide as markets calibrate to the looming possibility of an easing announcement by the European Central Bank later in the month. This in turn has contributed to global bond yields reaching nearly record lows in recent trading sessions. While election drama in Greece steals headlines, fresh consumer and producer price data scheduled for release this week in primary European Union economies will keep pressure on ECB president Mario Draghi as he attempts to stem the tide of deflation while navigating a political minefield. Critically, many observers have called into question what positive impact the increasingly priced-in sovereign bond purchase might actually have on the underlying economies of the 19 nation group. In a note issued over the weekend, Société Générale economist Michel Martinez and his team commented that “despite the positives arising from the lower euro and weaker oil prices, PMIs and the EC surveys should continue to point to low growth and inflation.” In other words, even as quantitative easing is increasingly priced into financial markets, the positive impact of QE is increasingly discounted by investors — creating a vicious circle for European policymakers.
German prices are softer than forecast. Germany’s December consumer price index came in at 106.7, lower than consensus forecasts, with the headline index 0.2 points higher than the same month in 2013 and unchanged from November. Despite recent marginal improvement in economic activity in Germany, low inflation levels significantly increase the pressure on ECB President Draghi to act on expectations for an easing announcement later this month.
Car sales in the U.S. could disappoint. Autodata Corp. will release total U.S. motor vehicle sales data for December today. Analysts are forecasting a marginal slowdown for car sales despite aggressive dealer financing in the lead-up to the holidays. Separately, economists are anticipating a moderation in consumer credit, primarily driven by nonrevolving credit in the form of automotive financing, when the Federal Reserve releases November numbers later this week.
Oil futures in sharp contango. As oil prices came under pressure over the weekend, multiple bank analysts noted that the steep futures market contango — with the current month futures prices significantly lower than contracts for delivery later in the year — is close to having an impact on physical oil shipments. They pointed out that West Texas Intermediate grade crude is approaching levels that would make it profitable to store seaborne shipments for future delivery at higher prices.
Rebound in manufacturing for Japan. The Markit/JMMA Japan manufacturing purchasing managers’ index levels released today confirmed that economic conditions are improving modestly for Prime Minister Shinzo Abe. The final reading for the headline index was 52, as the Japanese manufacturing sector expanded for a seventh consecutive month.
Portfolio Perspective: 2014 Thematic Review — The Year of the Divergence Trade — Jim McCormick, Barclays
Broadly speaking, 2014 was a story of economic, policy and, most importantly, market divergence. In a year when growth and inflation mainly surprised to the downside, the U.S. economy was the exception. After a poor, weather-distorted start to the year, the U.S. is on track for real GDP growth of just north of 2.5 percent in 2014. Moreover, even as global deflation became a pressing concern, aggregate U.S. inflation surprises were actually positive last year, if only just. This economic outperformance led to yet another year of U.S. equity outperformance. The S&P 500 ended the year up 11 percent. Among other major markets, only the Nikkei managed returns near this, at 7 percent . Notably, the MSCI ex-U.S. index was actually down on the year, a combination of lackluster returns and a stronger dollar. Admittedly, equity markets played mostly a supporting role in 2014. Indeed, the real effect of divergence was felt in rates and, more notably, foreign exchange markets. U.S. short-end rates divergence came first, although ultimately buying the dollar ended up being one of the best risk-adjusted macro trades of 2014. With the Fed on track to start raising rates by the middle of this year, we think the dollar rally likely has further room to run in 2015.
Jim McCormick heads global asset-allocation research for Barclays in London.
