THEMES TO GET US TO THE END OF THE YEAR
Risk assets have mostly recovered from their October swoon with several asset classes at all-time, or at least multi-year, highs. Volatility also spiked and remains elevated from their summer lows, although the price moves have been more one way over the past few weeks. The broader trends that we have seen develop since the start of fall will likely take us into the end of the year and are worth reviewing more closely. In particular, we expect that the continued bifurcating economic prospects will continue to drive diverging monetary policies amongst the largest developed counties. These different paths were clearly on display over the past week and we think responsible for a large portion of the bigger market moves recently. In particular, while the Fed officially ended the current QE program last week, Japan went the exact opposite route, increasing its ongoing QE program, while the government pension plan announced that its $1+ trillion fund would more aggressively allocate into the equity markets. Not to be outdone, the ECB continued its QE efforts with additional covered bond buys as investors await the start of ABS purchases and contemplate the possible start of sovereign bond QE. The latter program has apparently become a contentious point for several EZ central bankers as highlighted by the unusual airing of ECB dirty laundry https://tinyurl.com/mu5qk6d. Despite concerns that the article raises over the possible curtailment of Eurozone QE, we ultimately think that there is a shrinking list of options for the ECB, particularly given the weakening macro backdrop, and therefore expect its QE to include sovereign debt in 2015.