This could feed into the great financial balancing mechanism; as the dollar benefits from inflows caused by European investors buying Treasury bonds for their superior yield, so the stronger U.S. currency helps to contain American inflation (by reducing import prices). These flows also create extra demand for U.S. bonds and avert a damaging spike in yields. Meanwhile, a cheaper euro helps European competitiveness.
Or, alternatively, Europe’s weakness dampens U.S. exports, even as the flows into the U.S. inflate a bubble in financial assets there. Inflation risks put investors off U.S. bonds even at ever more attractive yields, and the American stock market is reined in. That could also happen.
A substantial school argues that worries over Europe are overdone. Its vaccine supply issue should be resolved during the second quarter. If the EU can improve its record on this front, it could soon make up much of the gap. European manufacturers, many of whom export to China or the U.S., seem very positive. This chart compares ISM manufacturing measures in the EU as a whole, Germany, and the U.S. Somehow, the position for German manufacturers seems even more positive than for the U.S.:
Where does that leave us? For the next three months, the pandemic continues to matter more than anything else. The greatest concerns are inflationary pressure in the U.S., and the EU vaccination program. The next few months will be dominated by the search for proof that the U.S. can avoid overheating , and the EU can get its vaccination program on track.
El Dorado No More
Meanwhile, one imbalance gets ever deeper. That is the gap between the north and south of the Americas. Latin America has endured another lost decade. It should be ready to enjoy a periodic boom, but the pandemic may stand in the way. At this point, it looks worrying.
Latin American equities’ performance compared to the rest of the world tends to be driven by metals prices. In the first decade of this century, the region functioned as one giant play on Chinese growth, as Asia's largest economy demanded more and more from South American mines. But the latest revival in industrial metals prices has overlapped with another downturn for Latin American equities:
Why is this? In a word, Covid. The following chart from Alejo Czerwonko of UBS Group AG shows what has happened neatly. Latin America’s death toll is far out of proportion with its share of the global population. Its problems, hampered by crime and poor governance, show no signs of going away:
The pandemic has had a horrible effect on the region’s finances, with budget deficits sharply deteriorating. Mexico is a significant exception, but much of the rest of Latin America finds itself in a fiscal hole. This makes it harder to attract the international capital it needs:
