- Equities performed strongly, with the US market up 33% and the UK rising 19%. Greater confidence that the euro will hold together boosted equities everywhere, especially in the troubled peripheral nations of the euro area. Greek equities have risen by more than 50% in the last 6 months; shares in Irish banks have doubled in the last year.
- The dominant theme in Western financial markets over the last year has been a rush by investors to riskier assets. Safe haven assets that prospered during the global financial crisis, such as gold, US government bonds and the yen, have fallen in value.
- Since last January, the value of UK government bonds has fallen 4% while riskier, high-yield UK corporate bonds have returned 12%. Gold lost 28% of its value 2013 and the yen fell 20% against the US dollar.
- In a classic sign that the market is banking on recovery, shares in more cyclical smaller companies in the UK have significantly outperformed those in the largest quoted businesses.
- Yet not all risk assets are in favour.
- Markets have become more confident about growth in the West but increasingly concerned about prospects for emerging markets.
- Emerging market currencies and equities have struggled. Chinese equities, the darling of investors during the global financial crisis, lost 13% of their value last year. The South African rand has fallen more than 50% against the UK pound in the last three years.
- Commodity markets have suffered too. Most saw sharp gains in prices in in 2009-10 but in the last two years the value of a basket of the leading commodities has flat-lined and some have declined precipitously. Wheat prices dropped 43% last year and rubber prices have halved since mid-2011.
- But the big message from asset markets send is that investors see better times ahead for the Western economies. Economists take a similar view.
- At some stage, central banks will need to start withdrawing stimulus from the global economy. In doing so they will need to strike a difficult balance. Move too early and they risk frightening asset markets and derailing the recovery. Move too late and they risk overheating and inflation.
- Getting growth going after the crisis has been a long, hard business. Prospects are immeasurably better today than five years ago. But successfully managing the transition from depression to growth remains a huge challenge for policymakers.
MARKETS & NEWS
UK's FTSE 100 ended the week up 0.1%.
Here are some recent news stories that caught our eye as reflecting key economic themes:
KEY THEMES
- Analysis by the McKinsey Global Institute shows that cross-border capital flows have slowed rapidly since the financial crisis, reversing the pre-crisis trend of increased globalisation in financial markets
- The US Federal Reserve says that it will "proceed cautiously" in slowing down its quantitative easing programme, in an effort to calm market fears over tightening monetary policy
- Trade data shows that China overtook the US to became the world's biggest trader in goods for the first time last year
- The US trade deficit fell to its lowest level in more than 4 years in November, with exports rising to a record high of $194.86bn
- UK car sales rose 10.5% in 2013, reaching their highest level since 2007 last year, boosted by cheap credit and improved consumer confidence
- The Financial Times reports that online purchases accounted for almost a third of non-food retail sales over Christmas, a record high based on official figures
- A BAE Systems built Tornado fighter jet fitted with parts that were made by a 3D printer completed a successful test flight, potentially paving the way for the wider use of the technique
- The Chinese government lifted a 14-year ban on the sale of foreign-made computer consoles, with shares in Japanese firm Nintendo rising to a 2 and a half year high on the news
- Ireland's 10-year borrowing costs fell to their lowest levels since March last year, following strong demand for the country's first bond issue since it exited its bailout programme last year
- Christine Lagarde, managing director of the International Monetary Fund (IMF) said in a speech that the IMF "will be revising upwards the global forecast of the economic growth"
- Official estimates show that euro area core inflation, which excludes volatile items such as food and energy costs, slowed to a record low of 0.7% in December
- Economists estimate that the record cold spell in the US could cost the economy up to $5bn, although some sectors such as online retail may benefit
- Alibaba, China's largest e-commerce firm, banned the use of Bitcoin from its websites
- The German central bank warned about the risks of using Bitcoin, and the "highly speculative" nature of the virtual currency
- French cosmetics firm L'Oréal is to stop selling its Garnier products in China due to poor sales
- Facebook acquired Bangalore-based mobile technology company Little Eye Labs for an undisclosed sum – the US company's first acquisition in India
- Jaguar Land Rover announced record sales in 2013, with strong demand for the new Jaguar F-Type and Range Rover Sport and growing sales in China
- The village of King's Langley is changing its name to 'King's Landing' for 7 days – after the fictional city from cult TV drama Game of Thrones – in an effort to attract fans of the show – game changer
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