We have often written about ignoring market noise as far as possible and in the current era of political volatility, this seems more important than ever
Looking at 2017, we saw a series of apparently major macroeconomic events, from elections in Holland, France Germany and the UK, to blow-ups in Korea and Catalonia. While many of these caused small corrections in equities, the FTSE 100 was up 10 per cent over the year, which stresses the importance of ignoring headlines and focusing on fundamentals.
In any case, we believe the most important factor in markets at present is the US dollar, with recent weakness potentially the main driver behind the synchronised global growth we are enjoying.
If you look at emerging markets for example, many are benefitting from ongoing reform but the weakening dollar has also provided a huge trade boost and created considerable tailwinds for these countries.
There are several reasons behind the weaker dollar, with a stronger oil price tending to weigh on the currency for example. But the greenback is currently considerably weaker than might be expected and as with everything US-focused at present, the presence of President Trump looms large.
Donald Trump helped turn a trend of dollar strength prior to his inauguration in January last year when he said the currency was too strong and US companies could not compete as a result, particularly against Chinese counterparts.
Since then, the dollar index is down close to 10 per cent and fell to a three-year low at the end of January when treasury secretary Steven Mnuchin, speaking in Davos, echoed Trump’s stance that a weak dollar is good for America and sparked fears of a trade war.
“The dollar is one of the most liquid markets. Where it is in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency,” he said.
Given the current stock market exuberance, this has led to speculation the US is seriously rethinking its policy towards the dollar. Back in the mid-1990s, following a period of extreme dollar weakness, Bill Clinton’s treasury secretary Robert Rubin argued a strong currency is in America's interest and that has been treated as accepted wisdom since.
Mr Mnuchin’s apparent support for a weaker dollar led to a sideswipe from European Central Bank president Mario Draghi, emphasising concerns among central bankers over the impact of exchange rate swings.
Mario Draghi said that although exchange rate movements are “a fact of nature”, some recent volatility was caused by “someone else” whose “use of language...doesn’t reflect the terms of reference that have been agreed”.
