FYI | Jun 23 2009
By Chris Shaw
Trading volumes typically decline during the northern summer, but another seasonal trend Standard Chartered has identified is the warmer months tend to be an unfavourable period for global risk appetite, reflected in the fact while the group’s Risk Appetite Index remains in neutral territory at present, there have been some signs of weakness in recent weeks.
While risk neutral implies a continuation of a choppy trading range rather than a full sell-off, the group cautions when the unfavourable seasonals are added it means the weakness in asset markets could continue in the near-term.
When risk appetite declines emerging assets are often hit hard given they imply a greater level of risk and this has been reflected in recent price action, the group noting such assets have been under pressure in the past couple of weeks as investors lock in profits.
The big unknown in coming weeks remains investor expectations for what the US Federal Reserve will do with respect to monetary policy, as the group points out this is a significant driver of risk appetite and in recent weeks the US yield curve has flattened as investors are becoming increasingly concerned the Fed will announce some sort of exit strategy from the easy money policies it has been running due to the global financial crisis.
But according to Standard Chartered, these fears now appear to be overdone as headline inflation is currently negative and could stay that way for some time given the current deflationary pressures in the system on the back of the weaker housing and credit markets.
The consumer de-leveraging process should also continue well into next year and the group sees this as limiting inflation as well, meaning it is deflation rather than inflation that is the enemy in the shorter-term, especially given the level of debt in the US financial system.
This potential for deflation to take hold supports the group’s view the Fed will take no action on rates when it meets this week, rather it is likely to try to restore confidence in the system. This means no quick exit strategy from its current quantitative easing policy, an outcome Standard Chartered suggests would be well received by markets and so could go some way to restoring recent losses.
