January was a traumatic and emotional month – more characteristic of a year-end market than a fresh start to a new year. Amid some astounding intra-month moves, the themes remain the same. China – commodities – liquidity – and monetary support from the Central banks who have tried in vain to ease the global financial system away from eternal life support.
Currencies were active and the ABGC Index begins the year with a solid gain of 2% net of fees. There were enormous intra-month moves in the Rand, the Rouble and Mex. Among the majors, Sterling lost 3.5% and NZ dropped 5%., while the Euro was unchanged against the Dollar. Meanwhile major equity indices showed massive losses during the month. S+P recovered from a 10% drop to close the month down 4%. The German DAX recovered from a 11% drop to close down 6.5%, the Nikkei bounced from down 13% to lose 4.7% for the month. The Shanghai composite – until recently the major driver of sentiment, continues to plunge, losing 23% for January.
Elsewhere, WTI crude recovered from a 26% loss to close down 10% for the month, which helped the most connected currencies such as the Rouble cut their losses, which in turn triggered a recovery in most EM currencies – more from short-covering rather than any trend change.
These are enormous moves which indicate the fragility of the financial system, a fragility further threatened by the Fed’s recent tightening and brave talk from the ECB, BOE and BOJ about a ‘recovery’.
All that ended in January. The ECB gave broad hints that further easing was coming in March – markets reacted mildly, having had their fingers severely burned when the last ECB meeting denied them sought-after relief. BOE’s Carney stated clearly that this was no time to be raising rates; the Fed’s latest meeting last week injected several notes of caution hinting that although there may be more than one interest rate move in 2016, it may not be in a northerly direction. To cap the month, BOJ joined the negative interest rate club whose members include the ECB, Sweden, Denmark and Switzerland.
It was this last move that came unexpectedly and has provided some much-needed relief for equities. It also saw the Yen close slightly weaker against the dollar and Euro, having challenged it’s sub-116 level during the month – a level last seen during the August 2015 crash induced by China.
It is easy to point the finger at the Central Banks for being overly-optimistic and out of touch, and blame them for inducing this kind of volatility. The truth is that our financial markets and economies are very fragile and have in no way recovered to pre-crash levels in terms of self-sustainability. The last crash was not truly global in nature but now that China has taken on such importance - one third of global growth in 2015 – the inter-connectivity of our system is even more vulnerable. One look at yields tells the tale: US 10YR dropped 35bps to 1.92%, while German yields fell 30bps to 0.32%.
Frankly, it is hard to imagine a world where ’normal’ means a relatively attractive positive interest rate for savers and investors. It is hard to imagine that unsustainable inflows into real estate and equities in major mature markets can be anything but trouble, and it is already a proven fact that the remaining engines of growth are spluttering.
To these issues we should add the present tensions in Europe, from the threat of a British exit, to crumbling unity on the continental political level. Markets are not really paying much attention with the exception of the pound. In spite of the fact that the USA may be about to embark on one of the most fractious election periods of modern times, the draw of the relative safety of the dollar should begin to increase. We may be on the verge of a major leg back into dollars.
Whatever the outcomes of these difficult times, the FX market will remain an active arena for well-managed opportunities. Currency markets have come to life from the equilibrium days of early 2014 and will always reflect the fears and moves of the financial system.