Eurozone Agreement Boosts Risky Assets by Reducing Perceived Risks to Corporate Profits
2nd July 2012
Equities have staged a useful rally over the past few weeks. The decision by the European Union (EU) to allow the European Stability Mechanism (ESM) to fund banks directly is an important first step in breaking the nexus between sovereigns and banks. The ESM has also been allowed to buy government bonds directly from the open market, as opposed to making loans to governments. Markets have viewed these developments as significantly reducing the chances of a disorderly breakup of the eurozone, at least in the short-run. Fears about a cruel fate for the zone have weighed heavily on risky assets, largely due to its implied negative consequences for corporate profits.
Second Guessing an Enigmatic Fed
25 June 2012
Many commentators, including myself, thought the Fed would use the 19-20 June Federal Open Market Committee (FOMC) meeting as the last politically feasible opportunity to ease US monetary policy ahead of the Presidential election. This would have involved an extension to Operation Twist, as well as further asset purchases. I alluded that the Fed could lower its economic forecasts to justify further easing. The FOMC duly obliged by lowering its central tendency growth forecast for real GDP in 2012 by 50 basis points from its April reading. Economic growth is now expected to be 1.9%-2.4%. In June 2011, the FOMC was forecasting 2012 real GDP growth to be around 3.5%.
Quantitative Easing: Back in Vogue at the Fed
20th June 2012
The behaviour of risky assets during Q2 has given central banks much to think about. Economic data released during the quarter has been broadly consistent with deceleration in global economic growth. US economic growth during Q2 was probably running at around +2%. The politically-sensitive US unemployment rate has failed to improve significantly in 2012, while gains in non-farm payrolls have clearly moderated from impressive weather-assisted increases during Q1. A continuation of strong payroll gains into Q2 would have ruled out any chances of further quantitative easing by the Fed. The economic environment over which the Fed currently presides strongly suggests that we will see another tranche of quantitative easing, potentially as early as this week.
Equity Market Culture: Struggling For the Starring Role?
7th June 2012
Of late, it has been fashionable, to debate the impending death of equities as an asset class. These arguments/deliberations follow a “lost decade” for US markets, where equities have badly underperformed government bonds. Even allowing for the fact that equities are the riskiest component in the capital structure, the underperformance versus government bonds seems quite extraordinary.
But what has gone so wrong resulting in the reduced appeal of this once much-loved financial asset? Ironically, the current plethora of negative comments regarding equities coincides with the 30th anniversary of the emergence of one of the most powerful secular bull markets in US financial market history, that lasted from August 1982 to March 2000.
China’s Economy Weighs on Risky Assets
28th May 2012
Financial markets are clearly worried about the outlook for the global economy. Risky assets have struggled in an environment where signs of economic deceleration have outnumbered evidence of faster growth. It is hardly surprising that, against this backdrop, government bond markets have flourished, particularly in the US and Japan due to their perceived safe-haven status. This is the third successive year where risky assets have struggled in the second quarter after a bright start to the year. On this particular occasion, however, China’s prospective growth path has come under much tougher examination. I have spent the past nine days in Asia, and the overwhelming concern, notwithstanding perennial worries about the euro zone, is just how events in China will play out over the next twelve months.
US Economic Policy Management: Getting Much Tougher
5th May 2012
The tone of the press release to last week’s Federal Open Market Committee (FOMC) meeting may have been on the hawkish side of expectations, although the FOMC maintained its commitment to keeping interest low rates low until late-2014. Meanwhile, US economic growth was weaker-than-expected in Q1. This raises key questions about just how the Fed will behave for the remainder of 2012 and 2013.
A Tougher Ride for Risky Assets in Q2
4th May 2012
There is a sense of déjà-vu about the uneasy start to Q2 for risky assets. It happened in 2010 and 2011. Having enjoyed robust gains in Q1, equity markets are taking a more sober approach about the economic outlook. Buoyancy in equity markets during Q1 was underpinned by perceptions that US labour demand had finally showed meaningful and self-feeding signs of improvement, and that funding stresses within the eurozone banking system had been significantly lowered by the European Central Bank’s aggressive use of Long-Term Refinancing Operations (LTRO’s). Such optimism now appears to be on shakier foundations.
The End of the Affair with Quantitative Easing?
3rd May 2012
There are 8 meetings of the Federal Open Market Committee (FOMC) each year. The second of four two-day meetings begins today. There is speculation that the days of unambiguously dovish policy rhetoric could be numbered. The minutes to the 13 March FOMC meeting, released on 3 April, confirmed stronger forecasts for both economic growth and inflation. Against the background of forecast-based policy, which has been embraced by the Fed under Chairman Bernanke, it seemingly becomes very difficult for the Fed to justify further monetary easing.
