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Daily Agenda: U.S. Dollar in the Spotlight

RBA surprises markets by making no rate change; FedEx announces deal to acquire TNT Express; Blackrock merges money market funds to comply with new rules.

The U.S. dollar’s performance versus the currencies of primary trading partners in recent days suggests that investors once again are recalibrating risk expectations. With last week’s employment report serving as an unwelcome reminder of the fragility of the U.S. economic recovery, market participants are now considering just how long and slow the process of tightening by the Federal Reserve may in fact be. With implications ranging from net-positive for commodities and some equity sectors as earnings season kicks off to a potential drag on bonds, the dollar is once again at the forefront of market sentiment across all asset classes.

RBA stays the course. The Reserve Bank of Australia made no change in policy rates during today’s monthly announcement, despite significant anticipation in currency markets. In the ensuing release from RBA governor Glenn Stevens, the bank indicated that it still anticipates moderate growth for the global economy.

FedEx to Acquire TNT. FedEx Corp. today announced an agreement to acquire Dutch delivery firm TNT Express in a deal valued at $4.8 billion. TNT was targeted by FedEx rival United Parcel Service two years ago but that merger was prevented by European Union regulators on antitrust grounds.

Mixed PMI results from Europe. Final composite Markit purchasing managers’ index levels for primary European economies showed German-specific levels improving while the euro zone as a whole slipped marginally from the flash reading. U.K. service-sector PMI exceeded expectations at 58.9, a multimonth high.

BlackRock to change fund offering. In a letter to investors on Monday, BlackRock, the world’s largest asset manager, indicated that it will close or merge several money market funds in order to comply with new U.S. regulations. The shift will reduce the total number of money market funds offered by the firm from 50 to under 40.

Greece discusses reparations. In Athens yesterday Dimitris Mardas, Greece’s alternate minister of revenue, informed a parliamentary committee that his office had calculated a €279 billion ($303.4 billion) payment due to Greece from Germany in reparations for World War II. With a payment to the IMF due on Thursday, this provocation is but the latest drama in the negotiations between Athens and Brussels.

Portfolio Perspective: Quantifying Political RiskDavid Semaya, Nikko Asset Management

Emerging markets have long presented a quandary for global investors. Over the past 25 years, emerging-markets equities have outperformed developed-markets equities by 3.3 percent a year, but with substantially higher risk. Annualized volatility of emerging-markets equity returns has trended at 23 percent a year, versus 15 percent a year for developed-markets equities. The attractiveness of emerging markets has been overshadowed by fears of excessive risk, with the nature of the risk itself becoming more difficult to gauge. Research shows that not only is the frequency of market shocks resulting in more frequent drawdowns, the source of the risk is changing from diversifiable idiosyncratic or stock-specific risk to nondiversifiable macropolitical risk.

Most asset managers are quite adept at analyzing and making judgments on the risk characteristics of specific securities, but understanding geopolitical risk and its impact on asset prices is outside the depth of many. Moreover, emerging markets present an even thornier problem, as the number of countries, their respective levels of transparency, and their political landscape makes it hard to systematically judge the investability of their securities.

Eurasia Group provides country scores that capture current levels of political stability, formal assessments of the future outlook for political stability and its impact on the business environment, and asset pricing models that estimate the interaction between political risk and market prices. Taken together, these quantitative inputs can be systematically incorporated into the portfolio management process. That is a step forward towards allowing investors a risk-controlled means of getting exposure to emerging markets, which are set to grow by 4.3 percent in 2015 and 4.7 percent in 2016, according to the International Monetary Fund, outpacing growth in advanced economies of 2.4 percent in both years.

David Semaya is the executive chairman of Nikko Asset Management.

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