The international picture

To the surprise of many, world equity markets have begun 2012 with a bit of a flurry. It certainly would have surprised the billionaires, the politicians, the economists, the hedge fund managers and the strategists who attended the rather somber Davos World Economic Forum last week. Their 3 day talkfest was as cold as the air outside and it merely provided a stage for many to talk their own trading book or of their coming books! We have an idea to make Davos more relevant next year – do not invite anyone who attended this year so that we can get a real perspective on the world outlook.

Whilst the Australian market’s rise of 5.5% in January is good, it is overshadowed by the lift in the German DAX Index (over 9%). Despite all of the doom and gloom permeating from Europe, the rally in the German market shows the power of the market to adjust to new events. The most significant of which is the sharply depreciating Euro. A falling Euro against the $US will stimulate German exports and export income. Export profits will rise with their engagement with China and thus the equity market is engaged in anticipating and revaluing the German Index.

This is similar to what happened with the US equity market in 2011. Despite the doom and gloom over there, the US market lifted in response to a sharply depreciating $US. Depreciation is generally good for a balanced economy that has a strong manufacturing base. Indeed, the $US depreciation should lead to the repatriation of US manufacturing jobs back from Asia and if it doesn’t then President Obama now proposes tax incentives to induce it to occur.

>> click to read the full Australian Dollar (A$) Report