Age of cheap money comes to an end.
And just like that it was all over as if it had never existed.
Yesterday’s fall in U.S. stock markets following Friday’s selloff precipitated by significantly stronger than expected wages data has heralded the end of the age of cheap money. The Dow Jones index has been on an incredible bull run and while this could be simply a correction it feels a lot more like the tail effect of efforts to keep the economy afloat at the height of the financial crisis.
It was predicted that runaway inflation would come as soon as the global economy started to pick up and for that not to happen, Jerome Powell’s Fed is going to have to act and act quickly.
Next month’s rate hike is now a done deal with a May hike now on the cards. Four hikes this year is now a possible scenario with some analysts discussing a move from 25bp to 50bp increments.
The dollar had a remarkable day with the index rising to 89.70 shrugging off fears of further falls as the Treasury gets its way. President Trump also shrugged off the 4.6% fall in the Dow seemingly more concerned about “long-term fundamentals”. This despite being happy credit for the rise in stocks.
British Chickens coming home to roost.
The economy, politics and Brexit, the holy trinity of headwinds for the UK each become a concern at the same time which bodes badly for the currency. Fridays construction PMI data was truly awful falling close to contraction. If a similar result were to be see for manufacturing and /or services, then a recession could be becoming.
Michel Barnier the EU chief negotiator, in London yesterday for the start of talks on the transition, called upon the UK to “make up its mind” over what kind of Brexit and future relationship it wants. Barnier seemed to dangle a carrot over membership of the single market without mentioning what terms the EU would expect. Theresa May has now confirmed that the UK will leave the customs union and single market after Brexit which is, to me, stating the obvious. It is not a case of hard versus soft as that was the basic deal that the referendum was based upon.
In the end it will all boil down to the provision of financial services. It is hard to know just how much Paris and Frankfurt covet London’s status, but it is doubtful that they will agree to UK membership of the financial passport even if the UK does offer concessions over EU banks status in the UK.
Mario Draghi must have slept better last night safe in the knowledge that his procrastination over the tapering of extraordinary measures had paid off as the euro fell back from what had become the critical medium-term level for the common currency.
Versus the dollar the 1.2520 level had become something of a target, but traders were loath to take the euro much above that level as their positions were getting stretched. The same was also true of Sterling and the fall for the pound has become even more pronounced without fundamentals to back its recent rally.
The outlook for the market has now become clouded and the recent confidence that has seen currencies almost behave as expected has given way to confusion and the opinion that drives markets. If liquidity remains high, there will be opportunities to make money with the usual caveats of strategy and money management very much to the fore.
The euro could test the 1.2280 level that was pivotal on the way up and should that level be broken 1.2000 beckons.
We are witnessing a brand-new set of drivers for the market. Recent discussions over the strength or otherwise of the dollar will take second place to any flight to safety if equity markets continue to fall.