One of the conclusions we can make for the first 10 days of the new year is that global central banks will stick to their passive (dovish) policy and do whatever it takes.
Whether it be Richard Clarida, Mark Carney or Stephen Poloz, among others, they made it very clear that official interest rates would not rise anytime soon. No matter the numbers. This is what they mean by “future direction”.
And it seems to be an effective tool. This will determine the trading environment for the near future.
We continue to hear that the economy is in excellent shape. That things are moving in the right direction. That the global obstacles, the recent tensions in the Middle East, and others – are losing ground and evaporating little by little. Or so it seems. There is a cautious optimism about the European economy and a positive excitement for Asia. All this is true. Or at least a valid working assumption. But this will not change the chances of interest rates rising.
Over the last few days a great deal of concern has been raised over the huge volume of issuing investment grade debt. Credit spreads are insignificant, low interest rates and investor appetite, domestic and international, strong as a bull. Don’t think of it as borrowers trying to tap into some perceived handicaps before they disappear. It’s just a wonderful environment for debt issuance. The money is being poured into IG Funds. Not limited to new edition concessions that are barely noticeable. Lipper said the influx to the US for the week ending January 8 was the largest ever reported. An interesting side of this equation is the appetite of investors. Investors believe, literally, that the mood for low interest rates will last forever.
A further consequence of all this is that asset price volatility is likely to remain low. This is exactly what central banks want. This can be a paradise for investors and frustration for traders. External influences can always interfere with the best laid plans. I can’t help thinking if politics, not the economy, drives the markets.
In this favorable environment, emerging markets may be able to do well, whether the dollar remains strong or not. And it’s really hard to see him losing ground against the major currencies. If all are hold, the dollar has a lot of appeal. The dollar index is just above the average one-year price, and that seems fair. Many analysts say the world will benefit from a lower US currency. And under normal circumstances this would be the case. This may be an exception. Developed markets would welcome soft currencies and would it not hurt newcomers? Everyone wins.
The yield curve is more difficult to predict. And economic numbers will have some impact. But if the bonds stay in the range we’ve been testing for the past few months, which seems like a different possibility, we may quickly go nowhere.
As for stocks, at the moment, very few things seem, excluding an insurmountable shock, would shake up long positions and scourge. This is a very strange place indeed, everyone seems smug and comfortable with their positions and it is difficult to argue with them.
This could be the biggest threat of them all.
Charts: Used with permission from Bloomberg Finance L.P.
Trader Aleksandar Kumanov