At this time of year we all tend to forget the wise words of baseball legend and funny man Casey Stengel, who said "Never make predictions, especially about the future."
Stengel has a point, of course, and an honest assessment of 2014 proves him right. We were correct last year to expect that the dollar would do better, but other market developments, like the precipitous fall in oil these last few weeks, took almost everyone by surprise.
Nevertheless, we think prognosticating is a worthwhile exercise. It’s a way to put structure to the major factors that we think will most influence the global markets.
There seems to be one general consensus for 2015, and that is the theme of divergence between the U.S. and the rest of the world. It has been 20 years since we have had such a difference in policy rates among the Fed, European Central Bank (ECB) and the Bank of Japan.
The magnitude of that divergence could argue for the Fed to raise its policy rate next year. However, given the global deflationary potential prompted by falling oil prices – and also because real wages have not come back to pre-Lehman crisis levels – some feel that it wouldn’t be necessary for the U.S. to rush and raise rates.
As to currency, we expect another good year for the U.S. dollar. In Europe, the market is expecting the ECB to come up with some sort of quantitative easing at the beginning of next year, so a failure to do so would result in disappointment. In recent months, the market has come to believe that President Mario Draghi will move toward a more stimulative monetary policy – with or without Germany. The view of a weak euro continuing on to next year seems like a good bet.
Also in Japan, Prime Minister Shinzo Abe and the Bank of Japan have secured the green light to continue with policy measures to revive the economy, including a delay of fiscal tightening such as another sales tax hike. And though the Japanese yen has halved in value against the U.S. dollar since Abenomics kicked in, it seems like there’s room for further weakening. We’re hearing that Japan wants to promote tourism as a major industry, so that means a trip to Kyoto may be more affordable next year!
After two years on the roller coaster, emerging markets will not be as hot next year. Indeed, lukewarm is how we would describe them. Case in point: China, which last week forecast that it will grow by 7.1%.
Global markets are constantly changing and that’s what makes our jobs so fascinating. It’s gratifying knowing that we are commenting on a page of history each week on Global Perspectives. We look forward to bringing you more insights in 2015. Season’s Greetings!
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