Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: June 21 2006 03:00 | Last updated: June 21 2006 03:00
Copyright The Financial Times Limited 2006
Central banks are keeping the pressure on financial markets. Sweden's Riksbank yesterday became the latest to raise rates (by a quarter of a point to 2.25 per cent) and, more significantly, Bank of Japan governor Toshihiko Fukui said that "monetary policy decisions should be made early". That revived thoughts of a Japanese rate rise in the summer.
Some strategists think that the withdrawal of Japanese monetary accommodation explains the recent setback in financial markets. The first wobble in emerging markets occurred just after Tokyo announced a change in policy.
"We continue to believe much of the market's problems are still related to the end of quantitative easing in Japan which has altered the cheap and available capital for cross border and cross asset carry trades, which led to speculative excesses in emerging markets and natural resources," says Tobias Levkovich, the US strategist at Citigroup.
Often, when one central bank turns off the liquidity tap, investors will switch funding to other currencies. But with rate rises occurring in the US, Europe and Asia, speculators have been forced to cut their positions. Those assets that rose fastest in the first few months of the year have fallen most.
David Kostin of Goldman Sachs says that the group identified the most concentrated holdings of 550 funds at the start of the second quarter; these positions have underperformed the S&P 500 index by more than 5 percentage points since the correction began on May 9.
The key question for investors is how far central banks will have to push up rates. In turn, that depends on how robust the global economy turns out to be and how persistent is the recent uptick in inflation.
Each piece of data is thus being minutely examined, almost as the Romans monitored the entrails of dead birds for omens. Yesterday's unexpected jump in housing starts was a case in point; disappointing for those who believed that housing market weakness would eventually bring a halt to Fed tightening. At the moment, the markets are far from sure whether strong economic data represent good or bad news.
Published: June 21 2006 03:00 | Last updated: June 21 2006 03:00
Copyright The Financial Times Limited 2006
Central banks are keeping the pressure on financial markets. Sweden's Riksbank yesterday became the latest to raise rates (by a quarter of a point to 2.25 per cent) and, more significantly, Bank of Japan governor Toshihiko Fukui said that "monetary policy decisions should be made early". That revived thoughts of a Japanese rate rise in the summer.
Some strategists think that the withdrawal of Japanese monetary accommodation explains the recent setback in financial markets. The first wobble in emerging markets occurred just after Tokyo announced a change in policy.
"We continue to believe much of the market's problems are still related to the end of quantitative easing in Japan which has altered the cheap and available capital for cross border and cross asset carry trades, which led to speculative excesses in emerging markets and natural resources," says Tobias Levkovich, the US strategist at Citigroup.
Often, when one central bank turns off the liquidity tap, investors will switch funding to other currencies. But with rate rises occurring in the US, Europe and Asia, speculators have been forced to cut their positions. Those assets that rose fastest in the first few months of the year have fallen most.
David Kostin of Goldman Sachs says that the group identified the most concentrated holdings of 550 funds at the start of the second quarter; these positions have underperformed the S&P 500 index by more than 5 percentage points since the correction began on May 9.
The key question for investors is how far central banks will have to push up rates. In turn, that depends on how robust the global economy turns out to be and how persistent is the recent uptick in inflation.
Each piece of data is thus being minutely examined, almost as the Romans monitored the entrails of dead birds for omens. Yesterday's unexpected jump in housing starts was a case in point; disappointing for those who believed that housing market weakness would eventually bring a halt to Fed tightening. At the moment, the markets are far from sure whether strong economic data represent good or bad news.
posted by Carlos T Mock at 9:27 AM
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