Market Viewpoints

When the S&P 500 index (SPX) fell ­10.5% by early February, it might have seemed a tall order to believe that we would be looking at a positive finish for the quarter. This is exactly what has happened as the central banks of the world have renewed their focus on monetary easing, with the biggest single impact coming from the US Federal Reserve. Last week, Fed Chair Janet Yellen provided a “Spring bounce,” by sounding more dovish than anticipated. Yellen’s comments appear to have ended the bull run in the USD and given a boost to risk assets. The Fed has undershot its inflation target for so long that it’s not unimaginable that it would be willing to accept some inflation overshoot (when there is one) to make up for the loss. This means that the interest rate risk is only to the downside. Inflationary pressures will likely remain elusive, and if they do come, then the Fed will most likely tolerate them rather than hike interest rates too quickly to quash them. Did last month’s G­20 meeting in Shanghai come up with a secret currency accord? A “Shanghai Accord” to weaken the US dollar, help the global economy and give China room to rebalance its economy? If the second largest economy of the world, China, is going to make a transition to a more flexible FX regime, and the emerging markets of India and China are to be a pocket of strong GDP growth that the world desperately needs, then both a contingency plan and global coordination are key. Therefore, if there was a tacit deal at the G­20 last month to keep the US dollar from strengthening further, it is certainly comforting. A weak USD will also be a help to Emerging Markets as a whole. The US economy has plenty of steam left in it and should continue its expansion for at least another eighteen months, if not longer. We were always unlikely to see a US recession this year, and the Fed’s decision to stay dovish has pushed this likelihood back further

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