The Daily Prophet: FX Traders Can't Get Out of Their Own Way

Connecting the dots in global markets.

The only sure things in life are death and taxes. Perhaps it's time to add the hapless performance of currency traders. The Citi Parker Global Currency Index, which tracks nine distinct investment styles, was poised to fall for the fifth consecutive quarter, dropping 1.04 percent this year through Wednesday. In fact, the gauge hasn't posted an annual increase since 2014 and is down 12.5 percent from its recent peak in March 2015.

But rather than spotlighting the failings of traders, the index's declines serve to underscore the many crosscurrents flowing through global markets that make it almost impossible to follow established rules of investing. For example, interest rates in the U.S. are higher than anywhere else in the developed world, which should attract foreign investment and bolster the dollar. And yet, the Bloomberg Dollar Spot Index will end down for the fifth straight quarter. More than at any time in recent history, currency traders not only have to consider things such as economics and interest rates, but also politics, trade wars, tariffs and shifting global alliances -- especially in the world's largest economy. A GeoQuant measure of political risk in the U.S. is up more this quarter than any since President Donald Trump took office.

"The greatest threat to the liberal global order that emerged after WWII and has evolved ever since comes from its key architect: the United States," the currency strategists at Brown Brothers Harriman wrote in a research report Wednesday. The Trump administration does "not accept that an international community has been erected out of the ashes of past wars. Instead, they view international relations as dominated by competing nation-states seeking short-term transactional advantage."

To the surprise of almost everybody, the bond market is wrapping up the quarter on a strong note. Yields on the benchmark 10-year Treasury note fell to 2.74 percent on Thursday, the lowest since early February. That's helping to push the Bloomberg Barclays Global Aggregate bond index up 1.11 percent this month and 1.41 percent this quarter. At the start of the year, most were calling for the start of a bear market in bonds as the global economy gained steam. Instead, concerns have risen in recent weeks that the economy may be losing some momentum, which should keep inflation from accelerating and temper some of the hawkish leanings of central banks. Citigroup's economic surprise index for the world's major economies, which measures data that exceed forecasts relative to those that miss, has taken a big tumble, dropping to its lowest since August. Also, most government bonds have benefited from the declines in worldwide stock indexes as investors seek shelter in safe assets. Another big winner this quarter has been Chinese bonds, which have gained 5.48 percent, according to the Bloomberg Barclays indexes. One area of the market not doing so well is corporate debt, which have lost value in sympathy with equities.

U.S. stocks staged a big rally Thursday, with the S&P 500 Index rising 1.38 percent, but it wasn't enough to prevent global equities from posting their first quarterly decline since the start of 2016 and their biggest losses since the third quarter of 2015. The MSCI All-Country World Index fell 1.48 percent for the quarter. Politics, the rising potential for trade wars, central bankers talking about pulling back from accommodative policies and some soft economic data all have stock investors re-evaluating their lofty expectations coming into the year. The good news about the declines in stocks, at least when it comes to the U.S., is that valuations as measured by price-to-earnings ratios are now the lowest since late 2016, according to the equity strategists at Bloomberg Intelligence. They also note that equities look attractive when you add the S&P 500's 1.9 percent dividend yield to its 2 percent buyback yield investors get a distribution level of almost 4 percent. That's a historically high level when compared with a yield of about 2.75 percent on the 10-year Treasury note. "Stocks are clearly suffering through a technical correction, yet there's still no evidence that equities' woes are spreading to other key asset classes," the BI strategist wrote in a research note. "This confirms that the technical correction in equities is still unlikely to result in a deterioration in broader fundamentals.

The Bloomberg Commodity Index snapped two consecutive quarterly gains -- but just barely. The gauge dropped less than 1 percent as gains in energy and agriculture products helped offset a drop in metals. One of the most compelling stories in the commodities market is gold. Bullion was wrapping up a third quarterly gain in late trading, a feat not seen since 2011, and exchange-traded fund holdings are near the highest in a half-decade, according to Bloomberg News. While spot bullion slipped 0.2 percent to $1,323.04 an ounce on Thursday, the metal is still up 1.5 percent this quarter, following a 1.8 percent gain in the final three months of last year. The rise comes even as the Federal Reserve has been raising interest rates. Gold’s haven qualities have come back in focus this year as the Trump administration picks a series of trade fights with friends and foes, and investors fret about equity market wobbles that started on Wall Street and echoed around the world. At the same time, although geopolitical tensions with North Korea may be easing, Trump’s pick of John Bolton as his national security adviser has spurred speculation of a potentially harder line against Iran. “While the obvious impact will be increasing safe-haven buying in gold, we see growing geopolitical risks raising concerns of supply-side issues in the oil market, too,” Australia & New Zealand Banking Group strategists wrote in a research note Thursday.

Despite all the ups and downs in the developed world this quarter, emerging-markets managed to come through relatively unscathed. The MSCI Emerging Markets Index was up about 1 percent this quarter, while its sister index of currencies was up 2.72 percent. Both gauges have now risen for five straight quarters. Emerging markets are benefiting from growth that’s twice as fast as in rich countries, earnings estimates that are at a five-year high and an improving inflation environment, according to Bloomberg News' Srinivasan Sivabalan. Even so, many investors are wondering how much longer emerging markets can brush off the turmoil in developed markets, especially since the ride this quarter hasn't been so smooth. The January-March period witnessed six distinct trends. The first three weeks took stocks and currencies to the best start to a year since 2012. Then a correction ensued in the following two weeks. Markets rebounded until late February, when hawkish comments by new Federal Reserve Chairman Jerome Powell sent asset prices lower. A diplomatic breakthrough with North Korea and Trump’s trade rhetoric accounted for the rest of the roller-coaster ride. “Has it been just one quarter?” asked Aaron Grehan, a money manager at Aviva Investors Global Services, which oversees $13.8 billion in emerging-market debt. “It feels much longer.”

Next week will bring some high level U.S. economic data on manufacturing, services and jobs. First up is the ISM Manufacturing index for March on Monday. The median estimate of economists surveyed by Bloomberg is for a reading of 60, or little changed from the 60.8, which was the highest since 2004. Then on Wednesday, investors will contend with the ISM's index of services, factory orders and durable goods orders. All should show an improving economy. The week ends with the monthly employment report. Although economists are forecasting a drop in the number of jobs created in March to 185,000 from 313,000 last month, that's not as bad is it looks because the economists were forecasting an increase of 205,000 for February. In other words, a reading of 185,000 would be in line with the recent monthly average.

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