Total assets held by major central banks are above $20tn. While Fed’s balance sheet has stabilized, the balance sheets of ECB, Bank of Japan and Bank of China have been increasing steadily.
Of course, the reduction in Fed’s balance sheet, expected to effectively start in 2018, will have a material impact on financial markets – the recent spike in volatility might be seen as a sort of recognition of that fact.
But global monetary base is still growing, which will in the end limit the potential for higher rates going forward and sustain high valuations in financial markets.
The USD has moved from « bump » to « dump » according to William R. Cline at the Peterson Institute. While the USD jumped right after the election of Donald Trump as US president, the currency has been declining since Dec 2016.
Deutsche Bank’s strategist team published a report to figure out what’s currently priced in by financial markets after the bout of volatility. Rising real yields are a clear threat to the rebound in equity market. But having recently talked to fund managers in other asset classes, real yields are a threat to many asset classes where lots of money have flown other the last years (EM debt for instance).
I attended a quite interesting presentation yesterday organized by Schroder on emerging markets. Two fund managers presented on equities and debt. The head of EM debt absolute return strategies had a very interesting analysis of the current environment.
Recent market sell-off has given a bit more breathing room to European equity markets. On average, the 12 month forward P/E for the Stoxx Europe 600 index currently stands at 14.4x, which looks reasonable when you consider that the market expects 10.1% EPS growth this year + 3.6% Dividend Yield.
The macro (rising rates and inflation) and market (rising equity prices) backdrop has people compare the current situation with 1987… right before the equity market plummeted. Are we in the same situation and does it mean the worst has yet to happen. Maybe not.