The big driver of the global markets for the next 12 months has been decided. It’s the end of the QE (quantitaive easing) in the US and the beginning of the one in Europe. The US QE ends this year at the same time the European QE starts.
That feels kind of co-ordinated and it is probably no coincidence that this switchover comes after the world’s central banks got together at Jackson Hole. It’s hard to watch Mario Draghi speak about the rate cut in the Eurozone and not sense an almost imperial tone. Suddenly the politicians sound like regional governors and Draghi sounds like a Roman Augustus pronouncing imperial strategy in terms of the performance of the empire’s various provinces.
If you have the country’s politicians by the budgets, their hearts and minds will ultimately follow. Central banks are the controllers of money in their societies; they can be suspected of being subtle in charge.
A lot of people are uncomfortable about that. For instance, it is clear that the ECB wants structural change. They want less political interference in the economy, which implies more laissez-faire capitalism and less socialism. Clearly that isn’t in line with the voters who select spendthrift socialists in much of the EU. So the ECB will buy the EU time by pulling the plug on the euro.
Meanwhile, in the US, the gravy train of free money is about to pull into its destination and kick its free riders off. This means interest rates will go up and so will the dollar.
So the future is clear. The dollar will be strong and the euro will be weak. This is going to play out for some time.
With a strong dollar, commodities will be weak. Commodities are a kind of anti-money, or anti-dollar more specifically. You might see commodities rising in price, but what’s happening is that money is losing value. As the dollar rises, so commodities should fall in dollars. With European QE, the euro will fall.
Not only will the euro fall because of the new QE, it will be pushed down by a rising dollar. It’s a double-whammy. A hard dollar and a soft euro means a very soft euro versus the dollar. It seems such a certain outcome, that it appears a no-brainer trade.
Euro equities should prosper with a weakening euro. Sadly though, a falling euro will make it hard to make money from stocks unless you are happy with more devalued euros.
However, a rising dollar will break the resulting weakness in US dollar equities. Less dollars, which are worth more euros might end up being more euros. This is fine if you want more euros, but not so good if you care about your dollar balance.
Meanwhile, Japan looks set to push the yen down or perhaps simply hold pat and wait for the end of the US QE to do the yen weakening for it. The UK has already set off trying to talk the pound down.
These currency moves will completely overshadow equities and commodities, and will dominate the results of the junior markets by revaluing the results in the currencies of the investors. If you are denominated in dollars or a currency that tracks it, then making a good return on a great euro denominated company may well end up as no profit at all.
Meanwhile, a 20 per cent rise in the dollar and a falling portfolio of US stocks might be a loss unless you sell up and change the dollars into euros and buy something in Europe.
That’s the ironic thing about a currency-driven investment environment, but it is the price of leaving the aftermath of the great global recession. Currencies are locked into a regime of state manipulation of interest rates and, now that that grip is to be weakened, currencies will rebalance under market forces in an unpredictable manner.
But the good news is, for traders it looks like the central banks are offering us a clear trading opportunity. For those brave enough it’s a high risk carte blanche to make quite a bit of money.
— The writer is the CEO of ADVFN, the financial services portal.
