Right or wrong, further central bank rate cuts still on the cards
Just over a year ago the Chinese central bank’s seemingly innocuous 2% devaluation of the renminbi versus the dollar sent global equity markets and emerging market currencies into a tailspin, with the threat of a rarely-defined “hard landing” in Chinese economic growth grabbing the headlines. Global risk appetite once again fell off a cliff four months later as markets fretted over the possible end of ultra-loose US monetary policy after the Federal Reserve had the audacity of suggesting that more hikes could follow its first-hike-in-a-decade.
It is somewhat pointless to debate whether markets were “right” or “wrong” to react to these events as prices are simply the by-product of supply and demand and can remain “right” or “wrong” for long periods of time (put differently markets are neither right or wrong, they just are). But it is fair to say that between August 2015 and March 2016 markets were particularly sensitive to any “negative” news from the US and China, be it weaker than expected data points or a suspect policy announcement.
Fast forward twelve months and markets have swung to the other extreme, desensitized to “bad” news and happy to amplify any “good” news. Global equities are up, volatility has collapsed, bond prices have surged and EM currency rallies have extended. The lack of volatility in currency, equity and bond markets, which I highlighted in It’s oh so quiet…for now (14 June 2016), was only briefly interrupted by the Brexit vote, terrorist attacks in mainland Europe and an attempted coup in Turkey. There are some tangible explanations for this. Read more