Short view By Philip Coggan - Financial Times
Short view
By Philip Coggan
Published: March 21 2006 02:00 | Last updated: March 21 2006 02:00. Copyright by The Financial Times
Financial markets continue to keep investors on their toes, with several reverses of sentiment already occurring this year. The latest saw a recovery in government bonds last week after a previous surge in yields.
That recovery seemed to stem from a change in attitude at the US Federal Reserve. Investors had previously believed that US short rates would rise to at least 5 per cent. But last week's Beige Book and comments from various Fed officials have raised hopes that the Fed might pause at 4.75 per cent.
It is benign inflationary trends rather than any concern about growth that seems to have provoked this change in the Fed's attitude. Indeed, there have been signs of a rebound in the global economy. Dresdner Kleinwort Wasserstein's economic surprise indicator has been rising significantly: the new orders component of the purchasing managers' survey is at a 20-month high.
With economic growth still expected to be strong, developed equity markets were steady last week, rising 0.8 per cent in dollar terms. Bid activity is clearly helping equities. But the "Goldilocks scenario", in which growth is strong enough to boost profits but not so strong as to provoke inflation, may also be making a comeback.
What was good for equities and bonds, however, was not so good for the dollar. If the Fed has nearly stopped raising rates, while the European Central Bank and Bank of Japan are tightening, the dollar's yield support will erode. A change in momentum for the dollar - it hit a seven-week low against the euro on Friday - could be serious. The long-term dollar bears will be focusing on the current account deficit, now 7 per cent of gross domestic product.
Then there is political risk. The United Arab Emirates is diversifying its reserves after the rejection of DP World's bid to run five US ports. Anti-Chinese rhetoric is increasing ahead of November's mid-term elections. US politicians seem determined to offend all the country's creditors. A significant dollar decline might put upward pressure on US bond yields, changing the investment climate again. It is hard to see equilibrium being established.
By Philip Coggan
Published: March 21 2006 02:00 | Last updated: March 21 2006 02:00. Copyright by The Financial Times
Financial markets continue to keep investors on their toes, with several reverses of sentiment already occurring this year. The latest saw a recovery in government bonds last week after a previous surge in yields.
That recovery seemed to stem from a change in attitude at the US Federal Reserve. Investors had previously believed that US short rates would rise to at least 5 per cent. But last week's Beige Book and comments from various Fed officials have raised hopes that the Fed might pause at 4.75 per cent.
It is benign inflationary trends rather than any concern about growth that seems to have provoked this change in the Fed's attitude. Indeed, there have been signs of a rebound in the global economy. Dresdner Kleinwort Wasserstein's economic surprise indicator has been rising significantly: the new orders component of the purchasing managers' survey is at a 20-month high.
With economic growth still expected to be strong, developed equity markets were steady last week, rising 0.8 per cent in dollar terms. Bid activity is clearly helping equities. But the "Goldilocks scenario", in which growth is strong enough to boost profits but not so strong as to provoke inflation, may also be making a comeback.
What was good for equities and bonds, however, was not so good for the dollar. If the Fed has nearly stopped raising rates, while the European Central Bank and Bank of Japan are tightening, the dollar's yield support will erode. A change in momentum for the dollar - it hit a seven-week low against the euro on Friday - could be serious. The long-term dollar bears will be focusing on the current account deficit, now 7 per cent of gross domestic product.
Then there is political risk. The United Arab Emirates is diversifying its reserves after the rejection of DP World's bid to run five US ports. Anti-Chinese rhetoric is increasing ahead of November's mid-term elections. US politicians seem determined to offend all the country's creditors. A significant dollar decline might put upward pressure on US bond yields, changing the investment climate again. It is hard to see equilibrium being established.
posted by Carlos T Mock at 12:28 PM
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