A cynic might claim that a thirst for yield and return is pushing investors to interpret “any news as good news” over the last few months. Indeed, last week risk assets navigated the failure of the constitutional reform referendum in Italy, and the ECB tapering of bond purchases, with aplomb.
We feel there is a disconnect between pricing/positioning and risk/reward across many markets. Fundamentally, this is explained by a mix of easy monetary policy, extreme leverage and structurally lower trend growth across the developed world. This is a concern in light of significant ongoing political risk (Trump policy implementation, Italian bank recapitalisation, Brexit, French elections). However, in the short-term, the global economy will not be going into recession and, as such, data is likely to be supportive.
This week we have the December FED meeting (which includes a press conference), at which the market expects a 25bps interest rate hike. As Deutsche Bank point out in a note this morning, any tightening should be seen as momentous, given approximately 670 interest rate cuts globally over the last 9 years! Attention will focus on changes to forecasts in the light of the incoming (fiscal stimulus friendly) Trump government. However, given considerable uncertainty about the details of the new President’s policy, the board will perhaps proceed cautiously. There are currently slightly more than 2 hikes priced in for 2017.
Elsewhere, following the recent 1.2mn barrels per day production cut by OPEC members, on Saturday non-OPEC producers agreed an incremental 558,000 barrels a day cut (including Russia at 300,000). Oil markets have responded favourably this morning.
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