The sunny side of the street
Maybe it is the festive seasonal spirit; perhaps it is a refusal to go gloomy into the New Year; it could even be a rational assessment of risk against potential. Whichever, investors have no interest in dwelling on the downside right now. Even sterling (GBP) has had a good run over the Christmas period.
Consider, for instance, the attitude of investors to Covid Omicron. Three weeks ago, there was real concern that the new variant might deal a crippling economic blow. Yesterday, more than a million more Americans (USD) tested positive for the virus. Yet the two main US equity indices closed at record highs on Monday.
There is a similarly buoyant attitude to the pound (GBP). The last few weeks’ torrent of negative news and commentary about the Johnson government might reasonably have made investors reluctant to hold sterling. But hold it they did, to the extent that it was the second-placed currency (behind the oil-powered NOK) over the two weeks surrounding Christmas, strengthening by an average of 1%. Although the mid-December rate hike by the Bank of England was not obviously a major factor in sterling’s success, it cannot have done any harm.
Investors’ optimism over the last couple of weeks is not out of line with 2021 as a whole, when traditionally “risky” currencies were generally preferred to the safe-havens. The pound (GBP) added an average of 4.2% over the 12 months, an outcome which did not always feel inevitable along the way.
The major currency winner for 2021 was the USD, closely followed by the CAD. The Greenback’s USP was the incessant talk of monetary policy tightening by the Federal Reserve. There was no actual interest rate hike, and there could well not be one until at least the second half of this year, but the Fed did keep its currency on the simmer with an accelerated taper of its asset-purchase programme.
At the other end of the spectrum, the Turkish lira (TRY) weakened by 44% over the year as inflation surged to 36%. The situation is reminiscent of similar major inflation-driven devaluations in the 1990s and early 2000s, though this time exacerbated by the intervention of President Erdoğan, whose economic theories fly in the face of convention. In late December, the president came out with another cunning plan, which was briefly supportive of the lira but looks no less eccentric than his other ideas.
Back to school
In theory, with the Christmas and New Year breaks over and done, this week should mark a return to normality for financial markets. There is certainly no shortage of heavyweight economic data on the agenda. The only question is whether or not investors can put behind them their seasonal turkey torpor.
The United States and parts of Europe went back to work yesterday, bringing the first of the monthly purchasing managers’ index readings. Switzerland’s (CHF) manufacturing PMI came in at 62.7, the Eurozone (EUR) registered a 58 and Markit’s US measure (USD) was 57.7. Overnight Australia (AUD) delivered a 57.7, Japan (JPY) a 54.3 and China (CNY) edged back into growth at 50.9. None of the readings were far adrift from forecast or much different on the month.
Britain’s manufacturing PMI (GBP) appears this morning, with the Bank of England reporting on mortgage approvals and money supply at the same time. After lunch comes the Canadian PMI (CAD), shortly followed by the other US measure (USD) from ISM.