The US – Economic Recovery is Slowing.
The FED acknowledged that the pace of the economic recovery is slowing, with weakness concentrated in sectors particularly affected by Covid-19. This assessment means that asset purchases continue, and tapering is pushed out, potentially until 2022. Looking beyond Covid-19, the key question for investors is when growth and monetary policy can normalise. We believe the second tranche of fiscal stimulus in H2 of 2021 will succeed in lifting inflation, growth and ultimately interest rates.
Credit Markets – Lending Standards Have Tightened.
The latest euro area bank lending survey showed that lending standards for firms and consumers have tightened throughout 4Q 2020. This was driven by the heightened risk perception of banks towards their borrowers and is expected to continue in Q1. However, the banking system itself proves resilient, as balance sheets remain healthy and the cost of funding low. The ECB’s banking supervision echoed these findings, making no changes to capital requirements.
Market Fragility – The Consequences of 10 Years QE.
Last week’s decline in equity markets collided with the exponential rise of certain single stocks, largely driven by retail investors. This is a prime example of the market fragility that a decade of QE has caused, as excess liquidity fuels asset bubbles instead of fixing actual economic issues. Financial markets are currently very disconnected from economic reality, by continuing to price a V-shaped recovery. In reality, the economic recovery is K-shaped with greater inequality between the poor and the rich.
To read more on our latest views, please see our Silver Bullet | The New Bond Vigilantes or visit our Insights section.
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