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28 January 2019

ECB fiddles as eurozone turns.

Compared to US Fed, ECB seems flat-footed as growth slows

During the recent period of market volatility the US Fed has in our view successfully re-positioned itself on the doveish end of expectations, both in terms of interest rate and more recently balance sheet policy. The ECB in comparison appears flat-footed, with ECB President Draghi failing to use the opportunity in his press conference last week to emphasise policy flexibility in the event of a downturn. Ironically, the most recent disappointing incoming data is concentrated in the eurozone, rather than the US.

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10 January 2019

FOMC Minutes: Up to speed with events but US-centric.

Meeting minutes suggested Fed closer to market views than originally thought

The minutes of December’s FOMC interest rate meeting suggest the US Federal Reserve is in fact more attuned to the recent tightening of financial conditions and risk of a slowdown than first thought. Tweaks to the language in the FOMC’s December statement were intended to emphasise the data-dependency of the Fed’s monetary policy stance and also that only limited policy tightening was now envisaged. While we view this as reassuring for the remainder of 2019, the heightened volatility of global markets following Fed Chair Powell’s press conference demonstrates the ease of a miscommunication when interest rate policy becomes politically charged.

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12 September 2018

Choose your narrative with care for 2019.

Trade, politics or tighter US monetary policy? One may have a light at the end of the tunnel

In the 10 years since the global financial crisis of 2007-2008 there has been a perennial fear that the withdrawal of central bank support would lead to a collapse in asset values, which had been artificially inflated by ultra-low interest rates and asset purchases. With equity markets outside the US now having fallen by 13% in US dollar terms since the peak in Q1 18 as US interest rates have risen, it is very easy to become convinced this is the start of something bigger. While experience is in general an advantage, investors should beware of the risk of being too quick to make emotive links with the run-up to the 2008 financial crisis and emerging market crises of the 1990s. Notwithstanding the recent market declines, when we look ahead into 2019 we can see scenarios which imply a continued, albeit slower, global GDP and profits expansion - and a pause or slowing in Fed rate increases.

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1 February 2018

Rising bond yields: Mini-drama perhaps, but not a crisis.

Rising yields a ‘known’ risk – declining economic momentum would be a bigger concern

This week’s modest declines in equity markets may be the largest of the last nine months but that is only an illustration of just how far equity market volatility has fallen. The narrative of rising bond yields and inflation expectations is being used to explain the market declines. This is understandable and we ourselves have previously highlighted the anomalously low level of global bond yields. However, rising yields are a known risk for 2018 and unlikely to create a major sell-off in equity markets by themselves. We would be more concerned if there was firm evidence of a meaningful slowdown in economic momentum. Such evidence is - for now - largely absent in either Europe, the US or China.

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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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15 February 2017

Yellen’s hawkish testimony: Rate increases ahead.

The strong performance of asset prices in the post-2008 era remains in our view largely attributable to lower than expected growth rates being offset by much looser than expected monetary policy. However, as expressed recently by Bank of England Governor Mark Carney “..we’re coming to the last seconds of central bankers’ fifteen minutes of fame”. If, as we believe, central banks are in the early stages of stepping back from unconventional monetary policy this is likely to have significant implications for asset prices.

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17 March 2016

Was there a “plaza” accord after all?.

Yesterday’s FOMC statement and Yellen’s press comments were unequivocally more dovish than the markets and we were expecting. Going into the meeting there was a reasonable case for preparing the markets for a rate increase in early summer, given declining unemployment and increasing US core CPI. As it turned out, external factors – perhaps a euphemism for undesirable moves in global markets and the US dollar – were in contrast almost overplayed. For us, “Peak fear” was last month’s story, so why bring it up now?

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10 February 2016

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

If Fed chair Yellen’s speech today was an opportunity to communicate a more dovish outlook for US interest rates it has been passed up. Yellen highlighted the decline in the US unemployment rate to 4.9%, in-line with the Fed’s own longer-run estimate of a sustainable level and only talked of the uncertainty in regard to recent external factors and financial market movements – and notably to both the upside and downside. This gives little ammunition for bulls expecting a quick and wholesale reappraisal of the trajectory of US interest rates.

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28/03/2019
Equity strategy and market outlook - March 2019

In this month’s strategy piece, Alastair believes investors are taking a glass half-empty view of the recent dovish moves in US and eurozone monetary policy, which has necessarily been accompanied by meaningful downgrades to 2019 GDP forecasts. However, risk assets globally have rebounded strongly since December and largely anticipated these moves from central banks. In addition, quite realistic market expectations of a continued front-line role for monetary policy in warding off any future downturn may be a confounding factor in interpreting the recent flattening of the US yield curve. Consensus earnings forecasts for 2019 appear to have stabilised, suggesting corporate guidance is already up with the revised economic outlook. The Brexit process remains difficult to predict but the risk of a long delay has increased in recent days. Equity markets appear to be in a holding pattern likely to persist until an improvement in the economic data, while merger and acquisition activity may be incentivised by falling credit costs.

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