Global Investing

Yuan vs. Dollar

The United States and China hold economic and strategic talks in Washington starting on July 27. The United States, International Monetary Fund and other groups have urged China to allow its currency to appreciate in order to help unwind global imbalances. Here is a chart showing the Chinese yuan vs the U.S. dollar.

UPDATE: More on U.S.-China economic ties here.

The Big Five: themes for the week ahead

Five things to think about this week:
    
PUTTING THE RALLY TO THE TEST
- The surge in risk markets has tapered off as investors take stock of recent weeks’ rally and the data flow injects a dose of sobriety. The scale and duration of any market pullback will be the test of how much sentiment has really changed. Sluggish April U.S. retail sales were the biggest cause for pause and this week’s flash PMIs will give more Q2 information.

FX FOCUS
- A pause in the recent recovery in relatively risky markets is shifting attention to the changing FX environment. Clear-cut correlations between moves in major FX rates and swings in risk appetite could be in the process of being eroded and some in the financial markets are wondering if and when relative economic performance will replace risk appetite as a driver for exchange rates. Investment flows will be affected if the dollar looks like it might resume a long-term downtrend.

QE EXIT STRATEGY
ECB, BOE, Fed officials are making reassuring noises about QE exit strategies but no clear mechanism or timeframe has yet emerged and all indications are that balance sheet expansion is still the order of the day. Yield moves suggest bond markets are more enthused in the short term by signs they will kept on the QE drip feed than by concern about the potential price problems down the road. Central bankers have yet to address the back up in yields that would be seen if they were they to exit the market at a time when debt issuance is continuing to flood the market – as it will for some time to come.

Carry on falling

Graphic evidence from Investec Asset Management (below) highlighting the demise of the carry trade. It shows returns from borrowing low-yielding currencies such as Japanese yen to buy high-yielding ones over the past 7-1/2 years or so.  There has been a roughy 50 percent decline since the end of July.

The insane mantra of emerging markets

With emerging market stocks taking a beating, now would not seem to be an obvious time to launch new equity funds for the asset class. Benchmarker MSCI’s main emerging market stock index, after all, has lost more than a quarter of its value so far this year and concerns about the U.S. economic slowdown spreading are rife.

Despite this, U.S. investment manager Putnam says it is set to launch two new emerging market equity funds in October – one for U.S. investors, the other for Europeans. Is this perverse or prescient?

Putnam, of course, reckons it is the latter. During a chat with Reuters in London, Boston-based officials said the move reflected the long-term outlook for Pulling for emerging marketsemerging markets which has not changed during the current market ructions. Growth projections for emerging economies remain far more attractive for equities than do those for developed markets, said Matthew Scales, a senior investment product manager.