The Lowdown on Markets to 16th September 2016
World Markets at a Glance
In this week’s issue
- Global equity and bond markets continue to react to central bank policy triggers.
- If the Fed raises rates in September will the markets over react creating a flash crash?
- Have the authorities begun to focus more on growth and less so on austerity measures?
- Emerging markets begin to rise in a world of Lower inflation, growth and interest rates.
- Bond yields continue back up as investor sentiment changes over central bank policies.
- The markets have discounted a Fed move in September but will Janet Yellen surprise us?
“Global equity markets dip on uncertainties surrounding monetary policies”
Global equity and bond markets are incessantly reacting to the nervousness surrounding central bank monetary policies. Certainly, the US, European and Japanese markets have all been moving in a tight trading range over recent weeks in anticipation of what their individual central banks might do next, given that lower than expected inflation rates, and below par economic growth, continues to be a concern after so many years of loose monetary policy and quantitative easing programmes.
Indeed, there now seems to be some real tangible anxieties around the market place that perhaps the greatest experiment in monetary policy history, quantitative easing, is not actually working, and that all it has done has been to distort the investment world, as liquidity has been pumped into the system creating asset bubbles, whilst interest rates, and bond yields have collapsed to all-time lows.
This in turn, has left many global investors worrying about the fate of bond markets over the coming years, and the possible risks of a bond tantrum, given the current levels in bond yields. Certainly, the unwinding of quantitative easing and loose monetary policy is expected to create a period of higher volatility in both bond and equity markets which global investors will need to navigate very carefully.
“A change of policy may have already begun, given the mawkishness comments from both the recent G20 meeting in China, and the Jackson Hole summit”
Interestingly enough, a change of policy may have already begun, given the mawkishness comments from both the recent G20 meeting in China, and the Jackson Hole summit in Wyoming. Certainly, the message from the G20 meeting seemed to be saying that government officials were actually uniting their thoughts more towards growth, meaning less austerity, and more government spending. And in a similar way, the Fed chair, Janet Yellen, seemed to be laying down the monetary foundations for an interest rate hike before the end of the year, as she spoke at the Jackson Hole summit.
Clearly this has had an immediate effect of late on bond and equity markets seeing bond yields rise, and in some cases above their negative yield trajectory and back towards neutral, whilst the global equity markets have become more volatile. Undoubtedly, these are very early days but it could be the beginning of the end of negative bond yields, and this crazy goldilocks scenario that we are in for bond markets. Equally, over the summer months the rally in bond and equity markets has proved to be quite demanding for many global investors, who were anticipating a rise in US interest rates back in June, which never actually materialised.
Over the coming months we will continue to see the central banks such as the Bank of England, the European Central Bank and the Bank of Japan support the bond markets with their bond buying programmes but as we have already seen in the past couple of weeks, they have not been prepared to make any advancements on their current programmes preferring to uphold there position and await further economic data, the outcome from the Federal Reserve Bank on rates, the announcement from the UK regarding invoking Article 50, and the result from the impending US presidential election.
Unquestionably, this current investment environment will continue to be problematic given that we need to acclimatise to a world that is delivering lower numbers, be it, nominal GDP growth, inflation, interest rates, or top-line growth. And in that embedded global economic scenario global investors will need to accept the fact that we will be in a period of lower investment returns, unless of course, they are able to seek out, and invest into businesses that continuously deliver outstanding levels of growth, during a very challenging economic background.
“The question surrounding risk has been turned upside down over recent times”
Certainly this world of lower inflation, growth, and interest rates has already seen many investors, particularly, those seeking income, venture back into asset classes such as the emerging markets, be it in equities or debt. Clearly, this strategy does come with additional implications such as perceived higher levels of risk, but of course, the question surrounding risk has been turned upside down over recent times, and with their superior growth rates, and yields, it comes as no surprise that investors have actually ventured back into this asset class.
And so to conclude our thoughts for this week it is most likely that the markets will continue to be hostage to the central bankers over the coming days and weeks, especially, with the chair of the US Federal Reserve Bank, Janet Yellen, and the governor of the Bank of Japan, Haruhiko Kuroda, about to inform investors and the markets on how they view the current economic climate both domestically and globally.
However, the markets seem to have already discounted any chance of the Fed actually hiking rates in September, therefore, we move on to a December hike, which could mean in the interim period both equity and bond markets continue with their upward momentum. Equally the central banks have been known to surprise the markets in the past, which could spark some pessimism within the markets and see investors rush back into perceived safer asset classes such as cash, the dollar and gold.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .