What Financial Markets Are Telling Us About the Economy

Victor Refael

If you’re using financial markets to take the pulse of the global economy, your chart’s telling you the patient’s ready to run a marathon while in need of a stint in the ICU at the same time. It all depends on the asset class you’re reading. The strong first-quarter performance of traditional safe-haven assets such as gold and yen implies caution. Meanwhile, the resilience of emerging-market assets sends the opposite signal. Across commodity, foreign exchange, derivatives, bond and equity sectors, here’s what markets are saying about the well-being of the U.S. and global economies.

After being one of the biggest beneficiaries of the reflation trade following the election of Donald Trump, King Dollar was dethroned in the first quarter — falling against every major currency. A strong dollar tends to have a negative effect on credit growth globally, a key impetus for an increase in economic activity. A lofty greenback also raises the cost of servicing dollar-denominated debt held abroad. As such, its retreat reflects firming growth outside the U.S. and serves as a source of support for the global expansion.

The dollar hasn’t been weaponized yet by any measures intended to encourage domestic production, namely, a border adjustment tax, and the cost of hedging dollar obligations has been trending lower. Benchmark U.S. equity indexes remain within reach of all-time highs as earnings expectations climb, reflecting the anticipation that the long American expansion hasn’t reached its expiration date. However, segments of the market expected to be key beneficiaries of fiscal changes sought by the Trump administration, such as infrastructure stocks and banks, have lagged the broader market. The rally in emerging-market indexes suggests the backdrop outside the U.S. has improved by more than it has domestically, a testament to the reflation trade’s global foundation. “We are seeing EM stocks outperform U.S. equities,” writes Neil Dutta, head of U.S. economics at Renaissance Macro Research. “This indicates improving growth outside the U.S.”