Markets breathed a sigh of relief after Fed Chair Powell’s remarks on Wednesday. Mr. Powell delivered a speech, which signified a policy U-turn compared to his thoughts presented in December. The Fed Chair not only claimed that the FOMC is ready to pause its rate hiking cycle, but he also stated that the Committee ‘will not hesitate to make changes [to the process of balance sheet normalisation] in light of economic and financial developments.’ This was the first time that Mr. Powell publicly and openly talked about the possibility of pausing the run-off of the central bank’s balance sheet – should the environment call for it. We argued on many occasions in our weekly GMUs last year that the Fed’s balance sheet normalisation policy is one of the key structural drivers of global capital markets and asset prices. The market’s rally in response to the Fed Chair’s remarks proves that our assumption was right.
So, what’s next? Are the bears gone and is Goldilocks back in the game? Probably, yes, as the Fed has become ‘patient’ in an environment where inflation remains muted, the headlines from the US-China trade talks sound increasingly more constructive and Chinese authorities have been delivering stimulus measures to boost the world’s second largest economy’s domestic drivers. These factors may allow investors to bask in the sunlight that finally radiates through clouds. Consequently, we are of the view that emerging markets have the chance of performing well in the coming months, as risks are being persistently priced out. Should further risks dissipate (such as Brexit, a potential recession in the Euro Area, scrapping the tariffs between the US and China, etc.), the prevailing asset price momentum could be sustained on a longer-term horizon – but these are stories for later.
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