EU: U.S. Fed May Not Hike Rates, Market Is Unprepared
As central banks across the world enter monetary easing mode, the assumption that the U.S. Federal Reserve will hike interest rates and tighten policy is questionable, according to David Absolon, investment director at Heartwood Investment Management.
“The Fed remains broadly sanguine about the U.S. economy, notwithstanding worries across the rest of the world,” he said.
Stronger household and employment figures in the U.S. are an argument to support higher rates. But reductions in energy capital expenditure, overseas threats to U.S. growth and a stronger dollar are already starting to weigh on U.S. manufacturing data. Company earnings results are also becoming harder to ignore, said Absolon.
The Fed will fall under the spotligh towards midyear, as anticipation of higher interest rates becomes paramount, predicted Absolon.
“We expect 2015 to be punctured by bouts of market volatility across asset classes, as central bank policies become less predictable," he said.
2) ECB Action Will Support Asset Prices
As the European Central Bank (ECB) steps up to carry out full blown quantitative easing, executives of L.A.-based Guild Investment Management say that this monetary policy will drive European stocks higher and the euro currency lower.
“Easing won’t solve the deeper problems that many economies have, but in the medium term, it will still support asset prices,” they said.
It is not just the ECB, but also India, Canada, Singapore and Peru that are aiming to fight against anaemic inflation or deflation which could threaten their future growth.
3) Greek Banks’ Struggle Could Trigger Grexit
As Greek banks are struggling from outflows and investors worry about the country's economic and political status, analysts fear the market cycle could become self-perpetuating and force Greece to leave the eurozone, whether it wants to or not.
Jessica Hinds, European economist from Capital Economics, wrote today that the less money is being taken out of Greek banks than during the euro crisis of 2011. But Greek banks are still dependent on funding from the ECB.
“If this lifeline were to be withdrawn after the expiration of the bail-out extension, it can hardly count on support from the Greek government given that the Government depends on the banks to buy its debt,” she said. “As a result, the collapse of the banking sector could well trigger a sovereign default, forcing Greece to stumble out of the euro.”
However, other market participants are more positive. Jeff Keen, fund manager at Waverton Investment Management, said today that peripheral countries in Europe, even Greece, are recovering.
“If the negotiations with the new Greek government progress quickly to a reasonable compromise we think investors will start to feel less negative about Europe in general and the Euro could have a bounce,” he said.
4) Cryptocurrencies Are Alive And Kicking
According to Guild Investment Management, Bitcoin's periodic price collapses and sudden volatility may have deterred the average investor, but cryptocurrencies may be more robust than given credit for.
“We see that cryptocurrencies will be a permanent and very disruptive presence in the global financial ecosystem – disintermediating banks by performing the same functions in a distributed, peer-to-peer manner,” they noted.
However, they said there is a long way to go before cryptocurrencies come into common use. The movements and actions of central banks will be watched much more closely over the coming year.
