Beaufort Analysis 264 – Now in 3D!

The centre of the economic and financial world was temporarily relocated to the Swiss Alps last week. The annual World Economic Forum (WEF), held in the alpine town of Davos, brings together the good and the great of politicians, economists and central bankers. For the first time in a decade, the mood and rhetoric emanating from Davos was cautiously optimistic. The International Monetary Fund (IMF) upgraded its forecast for world economic growth to 3.9% for this year and next, noting the ongoing strength of both Asia and Europe as key momenta for global growth. While the US tax changes will likely provide a boost over the short-term, the IMF warned that risks to growth remain over the medium-term.

One notable exception from last year’s meeting in Davos was the then newly inaugurated US President. This year was different as Donald Trump decided to honour the proceedings with his presence. It was an uneasy encounter as under his supervision, the US is questioning the benefits of international co-operation and proclaimed its intentions of looking after its own interests. So while the WEF promotes international collaboration on security treaties, open markets and attempts to address such challenges as climate change, Donald, sets out to look after number one, even at the expense of longstanding allies.

Another hallmark of Trump’s disordered administration has been the weakness of the Dollar. The negative sentiment towards the reserve currency of the world has been stubbornly persistent since the turn of the year. The recent US government shutdown, as written about in Beaufort Analysis 263, has clearly not helped matters, while the breakthrough in Germany’s coalition talks adds more pressure from the Euro. This was compounded at Davos with the following comment from Treasury Secretary Steven Mnuchin: A weaker Dollar is good for us as it relates to trade and opportunities. It is extremely unusual for a Treasury official to make such a blatant a comment aimed at weakening their currency; the down side of this verbal coercion of currency depreciation, is a currency or trade war erupting.

The good news about Dollar weakness is that it loosens global financial conditions, so equity markets have been a main beneficiary. To think this weakness will continue indefinitely is dangerous. The yield on short-term US Treasuries now exceeds that on US equities and with the hunt for yielding assets continuing unabated, the demand for US dollar backed assets could reverse.