The Fed is not on a preset course:
“After some shortlived volatility after the announcement, “risk” assets seemed to take the Fed decision in their stride, consistent with the view we have long held that the impact of Fed tapering on US financial markets should not be exaggerated. Indeed, equity indexes such as the S&P 500 ended 18 December markedly higher and earlyday losses in US government bonds soon levelled off. Two- and 10-year yields rose a relatively modest three basis points over the day, bringing the 10-year US Treasury yield up to 2.89% at close of trading on 18 December (up from 2.71% a month before and 1.60% at the beginning of May). We believe Treasury yields, after a measured rise during 2013, may be expected to rise further in 2014. If so, we believe this should simply be seen as a normalisation that mirrors optimism about the ongoing, rather unspectacular recovery of the US economy and the unlikelihood that short-term interest rates will rise anytime soon.We note that the Fed has left open the possibility of increasing its monthly bond purchases again if the economy does not improve in the way it expects. The Fed is not on a preset course.”
China steps up financial liberalisation
“The Chinese economy has perked up, with data showing that Chinese exports in November rose much higher than consensus expectations and retail sales accelerated. At the same time, thanks to the efforts of the authorities to rein in credit growth, Chinese inflation (along with imports) slowed in November, giving the government more room to push ahead with a slate of large-scale financial reforms. These reforms have been ongoing for the past two years and have included the easing of restrictions on lending rates. The step-by-step deregulation under way in China has also led to a rise in the value of the renminbi. The currency may rise further as the Chinese authorities move—however cautiously—toward its full convertibility. A rise in the value of the renminbi would put more money in Chinese consumers’ pockets while containing inflation.”
Europe: ECB raised its 2014 growth forecast
“As for individual European economies, a recent loss of momentum in some forward indicators has not deterred the Bundesbank from raising its GDP growth forecast for Germany to 0.5% in 2013 and 1.7% in 2014. Germany's trade surplus fell in October as import growth far outpaced that of exports. This may be seen as a welcome development, especially as Germany has been criticised for relying too heavily on foreign trade and running an excessively high trade surplus and current account surplus. The eurozone’s second-largest economy, France, continues to suffer from structural rigidities that have caused an
alarming drop in competitiveness. However, many French companies have been restructuring and, perhaps surprisingly, without the kind of worker protests or heavy-handed government intervention traditionally associated with that country. French business sentiment recorded an unexpected improvement in November, and the Banque de France in early December revised up its outlook for fourth-quarter GDP growth. Yet, we believe Europe will face challenges over the coming year on both the political and economic front, as well as in terms of policy.”
