Signs of strength as oil, the Euro and global PMI all push higher

Consumer Price Inflation could move higher globally if the recent surge in oil prices continues, with Brent crude at its highest level in three years. The net effect on inflation could be a rise of around 0.3% although, like all commodity price moves, the impact on inflation shouldn’t last long. Importantly, it’s unlikely to affect the global economic outlook which has been driving stocks higher.

Buoyant Euro pushes higher

The Euro has had a good start to 2018 getting close to its highest level against the US Dollar in three years. The latest rise was prompted by German Chancellor Angela Merkel’s unveiling of a coalition deal between her conservative bloc and the Social Democrats.

Interestingly, recent gains in the Euro come despite further adverse shifts in interest rate expectations. Investors continue to expect little or no increase in short-term interest rates in the Euro-zone in the next couple of years, whilst expectations for tightening in the US have increased markedly. The Euro continues to make headway against the US Dollar regardless.

One likely reason is further evidence of strength in the Euro-zone economy – such as the manufacturing PMI for the region which has risen to its highest level since 1997. This has cemented expectations that the European Central Bank’s (ECB) asset purchase program will end this year. Indeed, a couple of members of the ECB’s governing council have suggested as much in the past week.

Other contributors to the Euro-zone’s strength include a report (albeit disputed) that China was considering reducing — or even halting — its purchase of US bonds. US politics also weigh heavily on the Dollar against the Euro.

Global PMI on track for increase

The Global Composite PMI appears to be on track to increase to around 54.3 – almost a three-year high. Its rise over the past year – from around 53.5 in December 2016 – has coincided with strong performance in global equities.

The MSCI ACWI Index, which tracks the performance of large and mid-cap equities in 23 developed and 24 emerging market countries, rose by about 17% in local currency terms in 2017. It has also begun 2018 on a strong note. The increase was mainly due to expectations of faster growth in earnings per share – which is a function of the improving economic climate.

Cryptocurrency under pressure

Cryptocurrency investors have been left rattled after South Korea announced plans to abolish cryptocurrency exchanges whilst rumours circulated that China is planning a complete ban of bitcoin mining.

This could bring chaos to the bitcoin community as South Korea holds some of the world’s largest cryptocurrency exchanges and the majority of bitcoin mining occurs in China. If bitcoin isn’t mined, transactions aren’t approved, and new bitcoins aren’t produced.

Saying that, the cryptocurrency has sidestepped similar obstacles in the past. Cryptocurrency trading simply moved elsewhere after China banned its cryptocurrency exchanges in September, with South Korea and Japan becoming dominant trading hubs. This is just as likely to happen again, with exchanges moving to a region offering less regulatory pressure.

The more widespread bitcoin becomes, the more likely it is that stricter regulations will be enforced. One possible outcome is that regulators could force traders to disclose their identity – but any scheme that reduces the anonymity of bitcoin transactions could strip away much of its appeal. While bitcoin has overcome previous regulatory hurdles, it’s not certain that it could get past a bigger clampdown.

It’s hard to say if this will lead to the bursting of the bitcoin bubble. But even if it does, it’s unlikely that it would spell disaster for wider financial markets.

Australian household sector looking healthy

In Australia, the much stronger-than-expected 1.2% surge in retail sales in November (alongside the 0.5% rise in October) suggests that real consumption growth bounced back in the fourth quarter. This is also in line with other encouraging signs about employment and the health of the Australian household sector.

 

 

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