Brief market view
Tantrum or not?
It's been a couple of week's since a coordinated verbal intervention from the major central banks communication that QE will be rolled back, bond yields spiked and stocks corrected.
Fears of repetition of the 2013 selloff in all asset classes simultaneously - dubbed the “Taper Tantrum” - then lasting some 3 months, have so far not materialised.
We do not believe another "Taper Tantrum" will materialise this time around.
Our focus remain on the divergence in fixed income/forex vs stock markets as we believe the latter still partly discount Trump’s economic stimulus program, which continue to be postponed – at best.
Back in 2013 an article written by Wall Street Journal Economics Editor Jon Hilsenrath was viewed as a leak from Fed to test the market consensus. Markets had begun thinking of “QEternity”, i.e. that the QE programs would never end.
The reason we do not see a repeat Taper Tantrum performance is for the following three reasons:
- The expected US growth stimulus package is clearly not happening. White House resources are preoccupied with other things and the Republican party is mired in infighting
- Inflation currently remains well below target and short-term inflationary pressures are in fact easing.
- Market participants are aware that three of the four largest Central Banks regularly talk about monetary tightening.
2013’s Taper Tantrum did in fact signal the beginning of Fed’s tightening cycle.
We still expect ECB to follow a similar path and eliminate the QE program by 2Q2018.
Chart below show US and EU 10 year benchmark bond yields, which reflect no chock for today's market participants that global central banks have begun a slow tightening cycle.
Overall investment conclusions
For the moment, market participants appear to believe that the underlying economy is strong enough to withstand still further signals from the central bank on the timing for unwinding of the QE programmes, the biggest monetary experiment ever conducted live.
- Bonds: We favour equity correlated credits of neutral to short duration at the expense of high quality government bonds with long duration, particularly core Europe.
- Stocks: We favour equity regions positively correlated with economic growth/subdued inflation, such as Emerging Markets and Europe. We favour yield curve sensitive sectors as European banks.
- EUR/USD: Neutral. Moving around top end of the 2-year range. But we see no immediate signs of a stronger USD.
AWM risk allocation indicator, the balance between higher risk and lower risk assets. Gauge has come down meaningfully but remain constructive towards risk assets.