Two delicious legs of lamb and a long Easter weekend later, I have been left with tight fitting clothes and a level of self-inflicted indigestion I’ve not experienced since Christmas. Fortunately I’ve managed to keep away from the Lindt chocolate bunnies.
Also in need of time to digest the stream of negative news surrounding Facebook were investors, who were granted a respite following the relatively quiet week for news flow. Asset class returns in sterling and local currency are below, emphasising a surprising rebound in equities following the previous week’s sharp sell-off.
Table 1: GBP total returns
Table 2: Local CCY total returns
Sterling investors have benefited last week from a marginally weaker pound, though year to date currency appreciation has been a headwind. The notable exception to this is the yen, which has appreciated against the pound to make Japanese assets more valuable from a sterling investor’s perspective. Measured against a basket of currencies weighted by the level of trade, the relative strength over the last year of four of the major currencies is shown below.
Chart 1: Relative performance of GBP, USD, EUR and JPY against a trade weighted basket of peers
Source: Bloomberg, Deutsche Bank
The clear winner over the past year is the euro following an acceleration of economic growth in the Eurozone, though recently the currency’s momentum has slowed due to fears of the ECB ending its QE programme earlier than initially flagged. Meanwhile, a heavily out of favour sterling has appreciated 1.76% in Q1 2018. It has been spurred on by both inflation overshooting its 2% target and the prospect of future interest rate rises by the Bank of England. The yen on the other hand, although slightly weaker than one year ago, year to date performance against its peers is an impressive 4.91%. Where the depreciation until the beginning of 2018 can be attributed to rising inflation expectations, we view the recent strength as a risk-off, flight to quality feature of the currency.
However, the most notable currency move has been the US dollar which is sitting over 8% lower than one year ago. The weakness in the greenback has been driven by a confluence of factors including rising inflationary pressures and a President increasingly beating the drum of protectionism thereby weakening the integrity of the US Dollar in global trade world.
In the latest on trade tensions, over the weekend China announced retaliatory tariffs on 128 US products including food and manufactured goods, noting “… both sides should use dialogue and consultation to resolve their mutual concerns”. While currently the blows amount to nothing more than a light skirmish, there is a risk that it could mark the opening salvo to more substantive action and set a precedent for other countries to follow. The chart below outlines the countries with which the US has the largest trade deficits.
Chart 2: Breakdown of the largest contributors to the US trade deficit in 2017
Source: Bloomberg, IMF
THE WEEK AHEAD: US Non-Manufacturing ISM (Weds), US Balance of Trade (Thurs), US Non Farm Payrolls and Unemployment data (Fri).
STAT OF THE WEEK: The percentage of UK jobs at risk of automation over the next 20 years is 12% (OECD).
Data correct as at 30/03/2018.