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The long and difficult wait for the bears

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Geraud Charpin (pictured), Portfolio Manager, BlueBay Asset Management discusses how risk assets struggle to gain impetus as investors turn their attention to negative newsflow…

The uneventful meetings from the Bank of Japan (BoJ) and the Federal Reserve (Fed) earlier in September were broadly seen as a green light for risk assets, confirming that the largest actors behind the rise in asset valuations were still intent on keeping rates/yields at ultra-low levels. 
In the context of benign global economic data, continued stimuli in China, stabilised commodity prices and some repair work being carried out in emerging market countries, the very near term horizon (3-4 weeks) seems to present few areas of concern to justify a meaningful sell-off across markets.
Yet, since the immediate post 21 September Fed meeting uptick, the S&P 500 has found no strength, treasury yields are down over 15bps and the yen is almost up 1 per cent. These moves are hardly a sign of investor confidence in risk assets, rather they are signs investors are not eager to buy into risk assets and are very nervous about valuations. The market has clearly failed to take the dovish central bank message positively and has instead focused its attention on any negative newsflow. Indeed, IMF comments on Portugal, Fitch comments on China’s debt binge, the resurgence of Trump in election polls and the number escalation from the US Department of Justice (DoJ) in financial litigation have not been brushed aside as mere distractions but duly reported on the radar screen.
In corporate credit, financials have been in the spotlight and flashing red on investor’s radar screen. The US DoJ’s unusual tactic of leaking sky high demands of settlements has rung a few alarm bells given that numbers seem to be plucked out of thin air and enjoy an inflation rate that must be the envy of central bankers around the developed market world. While it seems very farfetched that a prosecutor would request a fine that would trigger the collapse of a systemic bank, the market is not ruling out any possibility that things somehow get out of hand. We suspect volatility and stress are likely to remain elevated until a final settlement figure is announced, probably in the next few weeks. While there are a few idiosyncratic developments that will generate volatility, banks are getting safer and regulatory bodies are becoming more receptive to the fact that we need healthy banks if we want to support much-needed growth.
In currency markets, the effort of the BoJ to re-steepen their yield curve is more likely to make yen assets more attractive with the unwanted side effect of strengthening the currency. At the same time, the yen is generally seen as a safe haven and could benefit from political risk events in Europe and the US. Conversely, we feel that the Mexican peso is pretty much pricing in a Trump victory. It is likely to remain volatile as the campaign progresses but we feel the risk-reward is now asymmetric.
Looking forward, our conviction is that negative interest rate policies are very destructive to the very fabric of our societies and cannot be maintained too long without causing meaningful collateral damage. Central banks will need to shift/twist or find new avenues to stimulate growth and inflation sooner rather than later. A failure to do so will only continue to fuel populist movements across the developed world. Investors are too focused on “lower forever rates” when central bankers are already actively seeking a way out of it. It is a long and difficult wait for the bears but there is no ‘goldilocks’ scenario out there, just a desperate war to generate growth out of an ageing developed world.

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