As many have experienced first hand, it’s been a wild start to the year for financial markets.
The first six weeks was utter carnage with risk assets tumbling on heightened concerns about the Chinese economy, primarily due to sudden weakness in the renminbi in the wake of the US Federal Reserve’s decision to lift interest rates for the first time in nearly a decade in December.
Then, as if a switch was flicked, risk assets rebounded in spectacular fashion, something that coincided with a dovish turn from major central banks such as the Bank of Japan, European Central Bank and US Federal Reserve. The US dollar weakened, risk assets bounced and the world, at least from a financial standpoint, was suddenly good again.
Now as markets approach the halfway point for the trading year, it’s an opportune time to see how individual asset classes have performed.
This excellent chart from Deutsche Bank research does just that, evaluating the performance of a variety of different asset classes, both for the year to date and from February 11, the nadir for risk assets following the China-induced slump experienced earlier in the year.
The solid bars indicate the year to date performance, with the black diamonds representing the percentage move seen since February 11.
If there’s a clear prevailing theme it’s that risk assets — be they emerging market stocks or currencies, high-yield debt or commodities — have outperformed so far, no doubt helped by the decline in the US dollar index, an influential factor in these days of highly correlated risk-on, risk-off trading behaviour.
The key now is whether the rebound in risk assets will continue into the second half of the year.
Given the recent improvement in US economic data and increasingly hawkish commentary from officials from the Federal Reserve, one can’t help but think that the near-term outlook for US interest rates, and as a consequence, movements in the US dollar, will determine whether or not risk assets will continue to outperform in the months ahead.