There are at least three takeaways from this first-quarter financial anomaly.
1. The U.S. economy is leading the global pack—despite fiscal headwinds. U.S. economic momentum in early 2013 positively surprised, and is greater than economic growth occurring overseas. This, in turn, is leading capital to the U.S. and supporting local assets. That same relative view of the world is also boosting U.S. yields, as investors price in tighter U.S. monetary policy over time. Consider equities: in the first quarter, global equity mutual funds and ETFs saw some $107 billion in total inflows, the strongest quarterly flow since 2000 and with capital biased towards the U.S. (EPFR Global data, including March 2013 estimates).
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2. The American investor remains cautious: we are a long way from needing to worry about irrational exuberance. Despite the first-quarter move towards stocks, we are not seeing similar capital shifts into other assets that would reflect a stronger cyclical view. Commodities, for instance, which should at least partially reflect demand expectations, fell more than 1 percent in the first quarter, using the Dow Jones-UBS index.
In addition, the type of equities that performed best in the first quarter—defensive sectors such as consumer staples, health care and utilities— suggested investors were not aggressively betting on economic strength but rather just wanted to get a little cash back into the market, seeking yield as much as capital appreciation from stable large-cap firms.
3. The U.S. is not the only country with an implicit weak currency policy. Indeed, other countries beat the U.S. in the "race to debase" in the first quarter. The Japanese yen lost nearly 8 percent against the dollar in the first three months of 2013, as the Bank of Japan pledged to do 'whatever it takes' to stamp out deflation. The British pound, meanwhile, fell 6.5 percent versus the dollar, in part on expectations that the Bank of England would tolerate higher inflation for longer as a price to pay for a stronger economy. The euro underperformed the dollar by nearly 3 percent, in part as non-existent growth and renewed peripheral stress (Cyprus and Italy) led investors to expect a greater easing bias from the European Central Bank.
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