The early weeks of 2017 in financial markets have been a sharp contrast to the same period in 2016, when markets fell sharply on fears about China’s slowdown and currency weakness. This year markets have continued their post-election pattern, rising on expectations of ‘Trumpflation’, and higher growth and corporate profits. Equities, again led by the US, have continued to outperform bonds, with the MSCI World index up 2.4% in January while global government bonds were up 0.9%. However, it was notable that global emerging markets, which underperformed markedly in the aftermath of the election amidst fears of trade protectionism and a strong dollar, recovered strongly, with the MSCI Global Emerging Markets index up 5.5% for the month, helped by currency gains and strong rises in Asian and Latin American markets.
The USD, which had risen sharply over the second half of last year, confounded the bulls with a sharp setback in January; the USD trade weighted index fell by 3.7% from its late December peak to month end, with emerging market and commodity linked currencies enjoying a strong rally as well as the euro and Japanese Yen rising by 2.7% and 3.7% respectively. Pound Sterling, weighed down by concerns about a ‘hard’ Brexit, underperformed, but still managed a 1.8% rise against the USD. Gold, meanwhile, benefitted from the weaker dollar and prospects of reflation, rising 5.1% in the month.