11 to 17 September: Walking the Tightrope

Last week we highlighted the potential for greater monetary policy uncertainty given the FED’s Board of Governors is due to change almost entirely over the next 6 months. Indeed, investors everywhere are walking a “Goldilocks tightrope” – the combination of strong near-term growth but low inflation and confidence about longer-term economic conditions means it is “not too hot” to worry about rising rates and “not too cold” to raise concern about slower earnings.

After a summer rally, global bonds sold-off sharply over the past 10 days on a combination of a hawkish Bank of England, declining risk-aversion and reasonable data. For now, this did not upset the unstable equilibrium, with equity markets rallying alongside falling bond prices. We continue to expect central banks to tighten only gradually. In other words, despite the potential for cross-winds, monetary policy will not be the lever that knocks markets off balance.

Elsewhere, the UN Security Council unanimously voted to adopt a watered-down US resolution to impose new sanctions on North Korea. The resolution includes limits on imports of crude oil, a ban on textile exports (the country’s 2nd largest export worth USD 700m per year) and a ban on new visas for North Korean workers (estimated to cost USD 500m in tax revenue). North Korea’s ambassador to the UN stated, “The forthcoming measures by the Democratic Republic of Korea will make the US suffer the greatest pain it has ever experienced in its history.”


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