May
The importance of what’s ‘priced in’
The key theme dominating financial markets is the tension between historically attractive valuations for ‘growth’ assets in contrast to a generally weakening global economic environment. Consequently, what’s ‘priced in’ is increasingly important. Data and events could still upset markets, but historically valuations have been the dominant long-term driver for equities, and these are attractive. Thus short-term setbacks could be a buying opportunity.
April
US recovery boosts risk assets
The US economy has continued to show evidence of recovery, providing a fillip for risk assets. The S&P 500 Index finished the first quarter up 10%, while the MSCI Emerging Market Index gained 14%. Yields on safe-haven government bonds have risen a little (yields move inversely to prices) as risk appetite has improved, but they remain extremely low by historical standards.
March
Policy-makers provide further liquidity boost
Policy-makers around the globe have provided still more liquidity for the global economy and financial system in recent weeks. The Bank of Japan adopted a formal inflation target for the first time and increased its target for quantitative easing (QE, or asset purchases). Similarly, the Bank of England announced a further round of bond purchases, while most recently the European Central Bank (ECB) lent an additional €530bn to European banks in its second long-term refinancing operation (LTRO). While expectations for further QE in the US have admittedly been scaled back, the extra liquidity from other major central banks should support risk assets. Indeed, the risk further ahead is that inflation makes an unwelcome comeback if policy-makers are slow to withdraw this extra liquidity once global economic recovery is firmly in place.
February
Risk assets begin the year on a positive note
Risk assets have had a positive start to the year on the back of continued stronger data from the US, signs of a soft landing for the Chinese economy and hopes for policy easing as a result. The liquidity injection from the European Central Bank (ECB) in December through its long-term refinancing operation for European banks and, more recently, an indication from the US Federal Reserve (Fed) that it will keep interest rates at record lows until 2014 have also helped support risk appetite.
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