Wednesday, April 8, 2015

Global equity markets march higher

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?


Benjamin Cole said...

Is the Fed keeping interest rates at low levels? Then how to explain even lower interest rates in Japan and Europe?

I wonder if the true Wicksellian interest rate a negative---that is, there is presently a glut of savings, more than can be deployed.

The Fed might be able to raise the Fed Funds rate, but that action may actually cause further declines in 10-year Treasury rates. As Milton Friedman pointed out, a central bank cannot tighten its way to higher interest rates for long.

When money is tight then interest rates are low.

Benjamin Cole said...

Add on--10 yr Treasuries now well below 2%, down maybe 75 basis points in last year. St Louis Fed says that 10 year Treasuries adjusted for inflation are at 0%.

Id we listen to many, the Fed had an ultra-easy accommodative monetary policy that caused the 2008 housing boom-bust and has been ultra-easy ever since.

Yet we come to today, and real 10-year Treasury rates are at 0%. This makes no sense.

This means sophisticated institutional lenders are willing to part with money for 10 years and do not see that there will be horrific inflation caused by easy money.

Grechster said...

The one, two, and three year charts of the gold price would further bolster Benjamin's case that we needn't raise interest rates.

Benjamin Cole said...

Matthew--Gold is a whacky item. The Indian government is moving to tax gold capital gains, something they have never done before. Gold has been a tax refuge in India. Who knows?