The Real Reason the Markets Move

If you read or listen to the financial media, more often than not either Brexit or Trump is to blame for market moves. But this superficial analysis will not help you grasp the main theme affecting your wealth in 2018. The most important economic development this year has been the strength of the dollar.  The Fed have raised rates four times since mid-December last year, which has been a key factor pushing the dollar higher.  And the strength of the US currency has had a major impact on emerging markets and commodity prices.  Emerging economies like Turkey that have borrowed heavily in dollars in the past face huge difficulties repaying that debt, hence the collapse in the Turkish lira and their stock market.  At one point this year the dollar was up over 100% against the Turkish currency.  Since January 29, when emerging markets peaked, these stock markets are down 7% in sterling terms.

Similarly the dollar’s strength affects the price of commodities.  Most of the world’s commodities are priced in US dollars, including gold.   So if the dollar goes up, gold becomes more expensive for non-dollar buyers, which reduces demand and sends the price lower.  Since January 29, the dollar price of gold is 12% lower.

So investors bullish of emerging markets and wary of inflation have not done well so far this year, mainly due to the strength of the dollar.  On the other hand if you are a sterling-based investor in the US stock market (despite all the media warnings about Trump), the value of your assets has increased 12% since January 29, which partly reflects the gains in the US stock market but also dollar strength has been a major contributor.

Meanwhile, despite all the column inches devoted to Brexit in the financial press this year, over the same period the yield on long dated UK government debt is unchanged , the FTSE All Share index is barely up 1% and European equities excluding UK are virtually unchanged, and the pound has fallen only 1% against the euro. The markets are certainly not responding to the fears generated by the media.

If you are interested in factors that influence your wealth, you might conclude that the excessive focus on Brexit and Trump as just lazy journalism.

Brian Durrant