A Cold Start

31/01/2014 at 3:30 pm

Yesterday came the news that the US economy grew at a 3.2% annualised pace in the fourth quarter of last year. This encouraging sign came on top of Tuesday’s Q4 GDP data for the UK, which capped off the strongest year since before the Great Recession. Yet markets hardly noticed. Perhaps it’s the freak winter weather over the Atlantic, but January has got 2014 off to a bearish start.

At the time of writing the S&P 500, the FTSE 100 and the Euro Stoxx 50 are all down by 4-5% so far this year and the Nikkei has dropped by over 8%. Ten year yields in safe haven markets are about 0.3%-0.4% lower; Greek debt has sold off. Emerging market debt is weaker, and EM equity is also off, especially in Latin America. The trade weighted yen has strengthened for the first month since August, and the dollar has risen too. Highest profile currency losers have been Argentina and a few other EM nations. Gold is up; industrial metals, down. Credit spreads are wider.

Risk, in other words, is off again.

Explanations for this sorry start vary, as ever. There is a vague consensus that emerging markets are a problem, and talk of capital flight and current account deficits. Unfortunately this doesn’t quite add up though. Turkey saw its currency lose nearly 9% of its value against the dollar by the end of last week and yes, it runs a material current account deficit – 7.2% of GDP at the last count – but it hasn’t run a surplus since 2002, so it is not clear why this measure should suddenly assume overriding relevance. For that matter, the Russian rouble has fallen by over 7% against the dollar so far this year, and yet Russia has posted a current account surplus each quarter since the crisis of 1998 (amassing some of the most substantial reserve assets in the world as it did so). Then there is the other North American dollar. Yes, Canada also has a current account deficit – but nobody seems to be talking about that in relation to the 5.5% sell off worn by the poor old loonie. In fact, coupled with more moderate weakness in the Aussie dollar, the real currency story begins to look like US dollar strength with EM specifics a bit of a side-show. Though again, that might not square with higher gold.

The half-hearted media attention given to EM is understandable. There is no news like bad news: crises shift copy. Away from emerging-land, however, there are plenty of other discrepancies which have gone unnoticed. In the UK we have had real evidence of the extent to which stronger growth is good news for sovereign debt, and with recovery on the Continent picking up, Spanish and Portuguese bonds have outperformed German bunds in this month’s rally. Ten year Portuguese debt came within a hair’s breadth of knocking through 5% today and has made new post-bailout lows. And yet Greek debt, as we have seen, has sold off – while the Athens Stock Exchange has outperformed all major markets, currently standing a little higher on the year to date.

In the US, stock market weakness has been accompanied by earnings reports which have surprised to the upside 72% of the time. As of this afternoon 250 of the member companies of the S&P 500 index have reported EPS for Q4 and have managed a +10.5% share-weighted change on the year since Q4 2012. Both of these percentages compare favourably with the picture at the end of January 2013, a month which saw the S&P rise by more than 5%.

There is more that could be said along these lines but the picture is clear – which is to say, not very clear at all, and subjected to interpretations which barely convince even at a superficial level.

What can perhaps be observed is that 2013 saw some unequivocal behaviour from asset classes and that uncertainty has reasserted itself since. We should not expect markets to move in straight lines. Sometimes this sets them against the grain of the fundamentals – and that, of course, can present opportunities.

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