Correlated Global Financial Markets

September 14, 2016

Domestic stock and bond markets moved pretty much in lockstep during the week between September 7 and 14th.  In that span, ten-year sovereign debt yields rose by 16, 15, 21, and 18 basis points in the United States, Germany, Great Britain and Canada but just 3 basis points in Japan, which unlike the other instances, was still below zero today. In the same statement week, The S&P and Japanese Nikkei each fell 2.3%. The British Ftse and Canadian TSE dropped by 2.2% and 2.4%, and the German Dax lost 3.3%.

Currency markets, on the other hand, exhibited comparatively greater variability from one another over the past week. Trade-weighted effective measures for the U.S. dollar, the euro, and Japanese yen all advanced between September 6 and September 13 although to different extents.  The dollar climbed 0.80% versus gains of 0.70% in the euro and 0.32% in the yen. The Canadian dollar and sterling, in contrast, fell 1.67% and 2.35% in trade-weighted terms.

Even more pronounced differentiation can be seen in currency movements over the past three and six months. Compared to three months ago, trade-weighted indices for the yen, euro and dollar climbed by 4.9%, 1.8% and 0.5%, whereas the Canadian currency and sterling fell by 3.0% and 7.4%, respectively. Over the last half year, the yen has soared 11.3%, much more than the gains of 2.1% in the trade-weighted euro and 0.5% in the loonie. The trade-weighted U.S. dollar actually depreciated 3.1%, and sterling tumbled 8.7%.

Domestic economic growth and consumer price movements have been tightly bunched and respectively slow and low. The latest on-year growth rates are 2.2% in the U.K., 1.6% in Euroland, 1.2% in the United States, 0.9% in Canada and 0.8% in Japan. Growth between the first and second calendar quarters this year, expressed at an annualized rate, range from negative 1.6% in Canada to +0.7% in Japan, 1.1% in the United States, 1.2% in Euroland and 2.4% in Great Britain. Consumer price changes over the last reported year range from negative 0.4% in Japan to 0.2% in the euro area, 0.6% in the U.K., 1.3% in Canada, and 0.8% in the United States.

We saw above that currency movement rather than a differentiation of national stock or fixed income performances has been the primary channel behind the nuanced profiles in monetary conditions among the economies here examined. Moreover, just as more or less synchronized stocks and bond performances pair up with similar domestic economic profiles — slow and low to be sure in GDP and inflation — the greater divergences observed in currencies is paralleled by wider divergences in current accounts. As a percentage share of GDP, Britain’s current account experiences a deficit of more than 5.0%, and the U.S. and Canadian current account deficits, although relatively smaller than the U.K., are also significant at 2.4% and 3.2%. But both Euroland and Japan run surpluses that surpass 3.0% of GDP.

On a day to day basis, the chatter from financial markets focuses upon domestic policies and domestic economic data, but ultimately it seems that differences in the balance of payments of major countries is the important driver of currencies, and currency shifts account for shifting monetary conditions between the countries.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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