Fed: A source of volatility – ANZ

Research Team at ANZ, suggests that if market expectations of a Fed tightening in 2016 firm, this could this could add to some of the usual seasonal volatility that tends to occur around this time of the year.

Key Quotes

“The current extremely benign risk environment has underpinned a search for yield, a major beneficiary of which has been EM. A possible reversal of that trend could spark renewed USD strength against higher beta currencies and underperformance in EM and APAC, in particular.

Other noticeable reactions in a ‘risk off’ scenario could be some USD underperformance against key majors (eg EUR, CHF, JPY), higher bond yields, and a tightening in financial conditions.

However, the global environment is now quite different to early 2016. Thus, any sell-off could be a buying opportunity given that Fed officials have become even more cautious and thus gradualist.

In addition:

• China anxieties have subsided and risk has traded well despite a generally weaker RMB. Chinese officials appear more committed to transparency so FX ‘shocks’ from the PBoC may not be repeated as they were in January.

• Commodity prices have recovered and are not haemorrhaging. This was a major drag on stocks and many EM at the start of the year.

• The BoJ is reviewing the effectiveness of monetary policy, including the impact of negative rates. When they cut in January bank stocks collapsed, dragging the Nikkei sharply lower. In turn this had a negative impact on global risk sentiment.

• Growth prospects for EM seem better than earlier in the year. The IIF growth tracker is near a five-year high and should be a strong pull factor for capital.”