Fed: Financial market fragilities - ING

Central bankers are (finally) waking up to the idea that something doesn't quite add up in financial markets right now, according to the research team at ING.

ING’s analyst team further adds that on the one hand, the combination of lower long-term bond yields and negative term premia tell us that investors are clearly worried about something; slower near-term growth in two of the world’s biggest economies (US and China) – as well as geopolitical uncertainties – may perhaps be fuelling such pessimism.

Key quotes

“Elevated risky assets and the low volatility market backdrop, when viewed in isolation, would suggest the opposite and that all is well when it comes to investors’ growth expectations. This inconsistency – which one could ascribe as a ‘goldilocks’ environment – is unlikely to persist and the risks are that a correction in one of markets is nearing. It certainly matters for FX markets whether bond yields move higher (and begin to factor in the same growth expectations being reflected in riskier assets) or whether the “somewhat rich” stock markets correct lower as global growth disappoints. While recent FX price action would indicate the former is likely (as seen in a higher USD/JPY, but lower $ against all other currencies), there is growing evidence that exuberance over the global recovery isn’t all that it’s being made out to be. Being long riskier currencies in this scenario could prove to be a painful strategy.”