Risk Aversion Will Yet Return. By Nicholas Hastings
Neither Ben Bernanke nor rallying equity markets are going to stop risk aversion from rising.
The U.S. Federal Reserve Chairman's economic assessment in testimony to Congress this week was more than likely totally accurate - the U.S. recovery will be very gradual and accommodative policy is here to stay.
However, with the nasty taste of the failed policies of Alan Greenspan - Bernanke's predecessor - in their mouths, investors may well need more details on Bernanke's exit strategy from quantitative easing before giving him the benefit of the doubt.
At the same time, the second-quarter earnings season may be proving much better expected - with even blue chips joining financials in helping to send the S&P 500 to new highs.
Not everyone is convinced by this performance, though.
Take the banks. With long-term Treasury yields set to fall again, given the poorer growth outlook, their net interest income is likely to fall too.
That's not all. "The bigger risk," said Paul Ashworth, senior U.S. economist at Capital Economics, "is of another blow up in the financial markets, sparked perhaps by the failure of another bank, insurer, hedge fund or even a sovereign debt default.
"Banks could quickly find themselves back at square one," Ashworth warned.
Strong earnings from blue chips don't bode well either. If anything, the high profits combined with weak revenues that many companies are reporting merely suggest further job cuts and an increased reliance on exports rather than any rise in domestic demand.
"Although companies have done a good job managing earnings expectations, this doesn't necessarily mean improved prospects for the real economy," said Marshall Gittler, chief strategist with the international group at Deutsche Bank Private Wealth Management.
Of course, these considerations will all have been part and parcel of Bernanke's assessment that implies easy monetary policy is here to stay for some time. Analysts say that rates won't be going up now until the second half of next year or even 2011.
In his testimony, Bernanke was keen to reassure markets that although the recovery may be slow, the U.S. central bank is still prepared to start mopping up the extremely high level of liquidity created by its quantitative easing policy should inflation pressures start to emerge.
However, there are clear signs that the investment community isn't entirely convinced. As currency strategists at UniCredit pointed out, Bernanke may have a "set of tools" for exiting quantitative easing but he has yet to reveal a strategy.
"Investors do not doubt the Fed's ability to tighten monetary policy but they doubt its willingness to do so in a sufficiently timely way," the UniCredit currency strategist said.
This doubt is hardly surprising.
Investors are still reeling from a financial collapse last year caused in part by Greenspan, who failed to raise rates fast enough and far enough in times of recovery to prevent the bubble that eventually burst, threatening the U.S. with a depression as bad as that of the 1930s.
Early Thursday, risk appetite improved slightly as Japanese stocks rallied a little and the yen came under pressure from talk of a flood of "Toshin issues" later this week. About Y700 billion of foreign-denominated bonds for Japanese buyers are said to be in the pipeline.
Otherwise, sentiment continues to de dominated by second-quarter earnings and hopes that existing home sales data later Thursday will reflect the buoyant 0.9% rise in April house prices reported Wednesday.
By 0715 GMT, the dollar had risen to Y94.25 from Y94.53 late on Wednesday in New York, according to EBS.
However, the euro was up at $1.4238 from $1.4211 with some analysts saying that the dollar was hurt by reports that the Central Reserve Bank of Peru could seek to reduce the dollar share of its reserves to 62% from 82%.
The euro was also up at Y134.20 from Y132.96. The pair is often seen as a key barometer of risk aversion.
Click Image to Enlarge
The U.S. Federal Reserve Chairman's economic assessment in testimony to Congress this week was more than likely totally accurate - the U.S. recovery will be very gradual and accommodative policy is here to stay.
However, with the nasty taste of the failed policies of Alan Greenspan - Bernanke's predecessor - in their mouths, investors may well need more details on Bernanke's exit strategy from quantitative easing before giving him the benefit of the doubt.
At the same time, the second-quarter earnings season may be proving much better expected - with even blue chips joining financials in helping to send the S&P 500 to new highs.
Not everyone is convinced by this performance, though.
Take the banks. With long-term Treasury yields set to fall again, given the poorer growth outlook, their net interest income is likely to fall too.
That's not all. "The bigger risk," said Paul Ashworth, senior U.S. economist at Capital Economics, "is of another blow up in the financial markets, sparked perhaps by the failure of another bank, insurer, hedge fund or even a sovereign debt default.
"Banks could quickly find themselves back at square one," Ashworth warned.
Strong earnings from blue chips don't bode well either. If anything, the high profits combined with weak revenues that many companies are reporting merely suggest further job cuts and an increased reliance on exports rather than any rise in domestic demand.
"Although companies have done a good job managing earnings expectations, this doesn't necessarily mean improved prospects for the real economy," said Marshall Gittler, chief strategist with the international group at Deutsche Bank Private Wealth Management.
Of course, these considerations will all have been part and parcel of Bernanke's assessment that implies easy monetary policy is here to stay for some time. Analysts say that rates won't be going up now until the second half of next year or even 2011.
In his testimony, Bernanke was keen to reassure markets that although the recovery may be slow, the U.S. central bank is still prepared to start mopping up the extremely high level of liquidity created by its quantitative easing policy should inflation pressures start to emerge.
However, there are clear signs that the investment community isn't entirely convinced. As currency strategists at UniCredit pointed out, Bernanke may have a "set of tools" for exiting quantitative easing but he has yet to reveal a strategy.
"Investors do not doubt the Fed's ability to tighten monetary policy but they doubt its willingness to do so in a sufficiently timely way," the UniCredit currency strategist said.
This doubt is hardly surprising.
Investors are still reeling from a financial collapse last year caused in part by Greenspan, who failed to raise rates fast enough and far enough in times of recovery to prevent the bubble that eventually burst, threatening the U.S. with a depression as bad as that of the 1930s.
Early Thursday, risk appetite improved slightly as Japanese stocks rallied a little and the yen came under pressure from talk of a flood of "Toshin issues" later this week. About Y700 billion of foreign-denominated bonds for Japanese buyers are said to be in the pipeline.
Otherwise, sentiment continues to de dominated by second-quarter earnings and hopes that existing home sales data later Thursday will reflect the buoyant 0.9% rise in April house prices reported Wednesday.
By 0715 GMT, the dollar had risen to Y94.25 from Y94.53 late on Wednesday in New York, according to EBS.
However, the euro was up at $1.4238 from $1.4211 with some analysts saying that the dollar was hurt by reports that the Central Reserve Bank of Peru could seek to reduce the dollar share of its reserves to 62% from 82%.
The euro was also up at Y134.20 from Y132.96. The pair is often seen as a key barometer of risk aversion.
Click Image to Enlarge
- 23 July |
- 0 comments
Post new comment