Subitha Subramaniam, Chief Economist, Sarasin & Partners
The early summer months have certainly been interesting times at home, but with the new government now in place and a new budget delivered, we should be able to look forward to some much needed stability. However, further afield there are some areas of concern to note, especially around the rising political and policy risk in Greece and around the Chinese financial markets.
There is of course a slight upside to political risk and that is that many significant concerns will already be visible in investor positioning, for example they may already be priced into equity valuations.
Volatility could be the new norm
Just as investors have grown used to low and negative yields, bond yields have rose sharply with a sudden selloff in European bond markets from mid-April to mid-May, though they have now fallen again due to the risk of Greek default.
We expect that markets will remain in a state of flux as the US Federal Reserve begins to normalise its monetary policy. The continuation of very low policy rates is set to encourage ongoing heightened sensitivity and volatility in bond yields across the globe. This suggests that government bond markets may gradually see their ‘safe haven’ status eroded as volatility rises, yields drift upwards and peripheral bond and credit markets are subjected to periodic bouts of risk aversion.
Ongoing confidence in the US dollar
Central banks’ intentional distortion of the price and availability of money (through interest rates and the money supply) has also distorted the relative price of currencies.
We believe that the US dollar remains the only credible ‘safe-haven/reserve’ among currencies.
We remain wary of the euro and yen, as currency weakness remains a priority for the ECB and Bank of Japan, as their large quantitative easing programmes continue.
A surprise Conservative majority in the General Election leaves us mildly more confident in the outlook for sterling.
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