Over the next few weeks and months we'll delve into some of the risks to our optimistic market outlook.
One of the primary risks is a too-strong USD.
The dollar is a countercyclical currency that typically declines when global growth accelerates and vice versa.
USD countercyclicality is partly due to the US's primacy as a consumer driven and services-based economy, with a relatively smaller proportion of our economy devoted to manufacturing and exports.
Less sensitivity to global trade and industrial activity means the currencies of more industrially-focused countries will - all things equal - strengthen relative to the USD during periods of global growth.
As the world economy strengthens, not only does capital flow to more industrial-oriented countries and regions - such as the EU, Japan and China - the world's need for the "safe-haven" of the USD including USD-denominated assets also diminishes.
During periods of global duress, international capital seeks safety in the relative stability of US markets, boosting demand for US dollars and USD-based assets.
Also, many advanced economies and emerging market nations have USD-denominated debt (totaling around $12 trillion!). A strong USD increases the costs of servicing this debt, forcing these countries to reduce spending - squeezing economic growth.
Lastly, when the USD remains strong, US goods become uncompetitively expensive for foreign buyers. When sustained, exports fall.
In short, a continued strong dollar would indicate global growth is likely not on track and geopolitical and economic risks remain too elevated - certain threats to our benign outlook.
Weekly Market Update, Week ending January 10, 2020
Last week the S&P 500 was up 98bps even as the Dow Jones increased 67bps, the Russell 2000 declined -18bps and the Nasdaq was up 1.76%.
As for US bonds, they lost -9bps.
Globally, the MSCI World Index increased 65bps and the Barclays Global Aggregate Bond Index was down -48bps.
The Euro Stoxx 50 added 1.02% in local-currency (Euro) and 36bps in USD. Meanwhile, the Topix added 1.16% in local-currency (Yen) and 58bps in USD.
Happy New Year and here's to 2020!
