For once, the consensus got it right and the Fed tapered quantitative easing (QE) by an additional $10 billion while maintaining its low for longer message. The Fed also upgraded its assessment of the economy, pledged to keep rates low well beyond unemployment hitting its 6.5.% target and did not mention the crisis brewing in the emerging markets. For the first time in over two and a half years, the FOMC vote did not include a dissenter, which can be interpreted as the committee completely agrees that either the economy does not need QE or that QE does more harm than good. We are, therefore, left to wonder if we should take the Fed’s improving view of the economy as an all clear signal that will put a floor under risk assets, or expect additional volatility caused by increasingly hawkish central banks in the developed and developing markets. For the moment, risk assets are finding a floor today, with U.S. stocks higher, treasury yields retreating and volatile emerging market (EM) currencies taking a breather. We would expect the bears to continue their assault onto these currencies, as they have been largely sidelined since yields in periphery debt started to rise over a year ago. Therefore, volatility should remain acute until real money flows start to stabilize the EM space, which is not yet visible in the ETF flows we follow. Since we are not of the belief that the turmoil in EM will result in global contagion, we will maintain our global growth thesis and ultimately expect that rates will continue to move higher while risk assets within stronger economies will continue to gain a disproportionate share of capital flows.
Bolton Global Capital is not a subsidiary or division of BNY Mellon or Pershing and has no relationship to either company other than offering clearing and custody services provided by Pershing to Bolton customers on a fully disclosed basis.
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