Macro Highlights March 23rd 2015

Analysis - 3/23/2015

Our Investment Research Department publishes a weekly newsletter with a round-up on the main economic developments and news flow.

European equities post record gains

As spring arrives, slowly but surely, the end of the first quarter shows that financial markets have got off to a flying start in 2015. Most asset classes have posted excellent performances year to date. To a large extent this can be put down to the actions and guidance of central banks.

The reassuring statements issued by the US Federal Reserve (Fed) and the quantitative easing programme begun recently by the European Central Bank (ECB) have kept confidence buoyant, sustaining investors’ appetite for risk. To simplify matters, we could say that central banks and pension funds continue to buy risk-free assets, including bonds with negative yields, whereas other players snap up anything else that enables them to generate performance—regardless of the dangers. [...]

Patience has its limits

In the statement issued by the US Federal Reserve’s policy committee last week, the word "patience" was nowhere to be seen. It had been used in previous communiqués to point out that a rise in US short-term interest rates was not imminent and that investors would have to wait. So, on the face of it, the Fed will henceforth be bent on tightening credit, although it was quick to add that there is very little chance of an uptick coming at the next FOMC meeting in April.

Even though the federal funds rate has remained near zero since 2008, the Fed has not all of a sudden got itchy feet. "Just because we removed the word patient from the statement doesn’t mean that we’re going to be impatient," the Fed chair, Janet Yellen, said. The schedule for monetary tightening has not been set definitely yet and the US bond market understood this perfectly, well ahead of time. Since last week’s Fed statement, it is not market expectations that have moved into line (by way of higher yields) with the forecasts of the Fed governors, but rather the other way round (see charts below). Ironically, bond investors have now even lowered their interest-rate projections for 2016 and 2017. [...]