No shortage of liquidity in global markets
We would argue that the debate over Fed tapering is also having a diminishing effect on global markets as other sources of liquidity emerge and investors engage in a much-welcome differentiation between the circumstances of individual countries.
As we moved into early October, bond and currency markets overall showed signs of calming down somewhat when compared with the middle part of this year, as investors seemed to be differentiating between the fundamentals of various countries. The volatility that hit bonds and currencies in places like India, Turkey and Indonesia has not been repeated so far (although that might change if doubts grow that the US debt ceiling will be raised by the 17 October deadline) as investors have come to realise that emerging economies taken as a whole are actually less vulnerable than they were in the past, including during the Asian crisis of 1997–1998. In general, strong currency reserves have been constituted since then, domestic fundamentals have been strengthened, debt levels have been reduced, and dependence on foreign capital has declined.
Bank of Japan
The Bank of Japan also needs to keep the monetary printing presses running because of the country’s massive public debt-to-GDP ratio (estimated at 214% in 2012). A shrinking current account surplus, a fast-aging population that is drawing down savings, and foreigners’ lack of interest in low-yielding Japanese debt have been making it harder to finance this debt. An official inflation target of 2%—a target that may prove difficult to reach—is a further reason for expecting the Bank of Japan to pump large doses of liquidity into the financial system, even as the Fed could start to close the taps.
On Europe
The mood has become more upbeat in Europe in general.The perception that the worst may be over in terms of economic adjustment, plus the recent performance of equity and credit markets around the Continent, has led to an upswing in investor sentiment for the eurozone as a whole. At the same time, this outbreak of euro-optimism is based on a very short series of data readings, with less positive factors also in the mix. Business investment remains weak, in large part because of subdued bank lending. Banks in a number of countries (especially lower- and mid-tier banks) remain exposed to a high level of non-performing loans and the requirement to meet ever-more stringent regulations as well as raise their capital ratios. Such banks have been reluctant to help economic recovery through increased lending. In addition, much of the improvement in growth in the eurozone, sceptics argue, has stemmed from a decline in inflation and an end to destocking. It seems unlikely that such factors can generate a lasting recovery in the absence of a solid rebound in business investment.
Das vollständige Dokument finden Sie hier:
Franklin Templeton-Fixed Income Commentary (PDF)
