21 September 2017

US rates: Has the fuse been lit?.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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17 March 2016

Was there a "plaza" accord after all?.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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15 February 2017

Yellen’s hawkish testimony: Rate increases ahead.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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10 February 2016

Yellen's testimony - No change to the Fed's view.

Conditions for synchronised, if gradual, tightening of policy appear in place

To our surprise yesterday’s Fed statement and projections not only re-confirmed the probability of a rate increase later in the year but also continue to forecast three further rate increases in 2018. Furthermore, the Fed announced the pace of reduction in its balance sheet which, while an initially modest US$10bn per month in October will rise to US$50bn per month by the end of 2018.  The initial market reaction has been for the yield curve to flatten further as investors price in an increased probability of a Q4 rate rate increase while US 10y bond yields rose by only 3bps. Equity markets may be sanguine for now but we view this monetary headwind as a slow-burn fuse which may challenge investors again during 2018.

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10/01/2018
Equity strategy and market outlook January 2018

In this month’s strategy piece, Alastair George believes that 2018 is likely to be a year of two halves for global equity markets. Initially, strong economic momentum and investor sentiment is likely to prevail over the negatives of high valuations and continued monetary tightening. However, the delayed impact of tighter policy in 2017 and further tightening in 2018 appears to be a strong headwind to further equity performance from mid-year. He notes that output gaps in developed markets have now closed, in aggregate, for the first time since 2009. This is a structural change from the slack environment which persisted following the financial crisis of 2008-09 and investors should therefore consider sector allocations carefully. In his view, equity portfolios should now be tilted towards sectors which have offered a degree of resilience and a better risk/reward in the past. Specific growth or event-driven situations should also be favoured over broad market exposure, as developed market price/book valuations as a whole remain unappealing.

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