Risk Assets ...Time to Exit?

by Michael J. Howell21. June 2013 08:06
The mid-June FOMC spooked markets with Bernanke's exit talk. Actually, we learned nothing new here and in fact if anything the long-tail exit should be reassuring. In our view, this liquidity cycle should last until 2015, and we still rate 2016/17 the mst likely time for the next banking crisis. So what now? The big stories for 2013 are not about the Fed, but three other things (1) strong growth in US private sector cash flows; (2) Bank of Japan QE and (3) lack of any QE in Eurozone and China. In short, liquidity may be high globally but it is skewed first towards the US and Japan and second skewed towards private sectors. Central banks overall including the Fed are not as easy as many assume. Strong private sector liquidity is a sign to us that economies will pick up strongly in the second half 2013. This tension is worrying bond markets. Money now has two directions to go it: real activity and financial assets. This must heighten volatility. The next 18 months should still see rising risk asset markets, but it will be a much bumpier ride.

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