For more than two years I've been highlighting the big improvement in the outlook for the Japanese economy that has resulted from the BoJ's determined efforts to weaken the yen. (For background, see a series of related posts here.) It's nice to see that things continue to improve, and not only in Japan but now also in China and Europe as well. The U.S. stock market hasn't made much headway for the past several months, but global equity markets appear to be taking up the slack. As the U.S. takes a breather, the rest of the world is moving ahead, fueled by cheaper oil prices. This can't be bad for the U.S., since it means the economic fundamentals all around the globe are improving.
The chart above says it all. The market cap of global equity markets, as calculated by Bloomberg and measured in dollars, has reached an all-time record high of almost $70 trillion. Valuations are up 9% since year end, even as the U.S. market has been relatively flat and the dollar has risen against most other currencies. That's pretty impressive.
The Japanese stock market is up almost 14% year to date, and it has almost tripled since the lows of 2009. As the top chart shows, stocks have improved in concert with a weaker yen. But that's not the whole story: the bottom of the two charts above shows the value of the Nikkei in dollars, and it has more than doubled since the lows of 2009. In other words, Japanese equity market gains are not just due to the decline of the yen, they are most likely due to some genuine improvement in the outlook for the economy, and part of that improvement is a weaker currency.
The first of the two charts above compares the Euro Stoxx 600 index to the S&P 500, while the bottom of the two charts shows the Euro Stoxx 600 Index in dollar terms. Eurozone stocks are up to new highs in Euro terms but not yet in dollar terms. That's not too surprising, considering how Eurozone economies have been struggling in recent years, burdened by default concerns and the turmoil in Ukraine.
The big news is to be found in Asia: year to date, the Hang Seng index is up 11%, and the Shanghai Composite is up 23%. In the past 9 months, the Shanghai Composite has almost doubled. These gains come independent of currency behavior, since both the Hong Kong dollar and the Chinese yuan have been relatively stable vis a vis the dollar.
The chart above focuses on the dramatic improvement in Chinese equities since mid-2014. Is it just a coincidence that oil prices have fallen by 50% over the exact same period? Or could it be that cheaper energy is a tremendous boon to the Asian economies?
The chart above compares the Shanghai Composite (white line) to the inverse of oil prices (orange line). The correlation looks pretty compelling. Cheaper energy prices are contributing strongly to a healthier outlook for the Chinese economy.
Question for the Fed: with all this remarkable improvement going on around the world, why are you guys still so concerned with keeping interest rates at exceptionally low levels?