USA at the centre of events

January was a good start to the 2018 stock-exchange year, especially for American shares. Towards the end of the month, rising interest rates became a concern and the markets fell sharply.

For the month as a whole, the American S&P 500 Index rose by all of 5.7 per cent measured in USD, while the European Stoxx 600 Index increased by 1.7 per cent measured in EUR and the Nordic VINX Index fell by 1.3 per cent measured in NOK.

Focus on fiscal policy

In line with the gradual reduction in the USA's monetary policy measures, more attention is being paid to the fiscal policy. The USA's financial outlook has improved considerably during the past few months, greatly due to the much talked about and now finally agreed on tax reform. The forecast consensus GDP growth in 2018 has increased from 2.4 per cent to 2.7 per cent, which is well above the trend line. In an economy that is already doing well, it will be important to monitor pay growth and inflation going forward.

Monetary policy brake

In order to normalise the monetary policy, the US central bank (Fed) is now raising the base rate. At the same time, it is systematically reducing its balance sheet. As a result of this and higher inflation expectations, long-term global government bonds have risen a lot, especially in the USA, after being relatively stable throughout 2017. In time, higher interest rates may lead to lower demand from households and companies.

The dollar continues to fall

Despite the USA's constantly improving growth prospects and the increasing interest-rate differential between the USA and the rest of the world, the US dollar has fallen against most other currencies. Apart from a small break at the end of last year, this fall has lasted since the beginning of 2017. Several factors, such as improving growth prospects outside the USA, less volatility and a higher risk appetite, are pointed out as explanations for this. The fact that the eurozone also does not appear to be falling apart is probably contributing to the weaker dollar too.

The road ahead ...

February has started with a sharp fall on the world's stock exchanges, driven by rising interest rates and growing fears of inflation. At the end of January, global shares had risen for 14 months in a row, which is the longest upturn period since the 1960s. The market was therefore long overdue for a correction. At the same time, no specific news had been announced when the stock-exchange fall grew in strength on Monday 5 February. There is speculation that self-reinforcing algorithms drove the share sales. Here at Delphi Funds, we do not believe the current unrest is the start of a long-lasting stock-exchange fall – the fundamentals are too positive for that to happen. We still believe shares are the right asset to invest in. Remember that periods of unrest also provide buying opportunities.

"Markets love volatility"
Christine Lagarde