"Risk appetite has started to abate expressed by lower equity markets, rising credit spreads and continued steepness of bond curves."
This is how the latest note from BNP Paribas fixed income team starts. It is a commentary on how the markets have finally decided to place higher credence on the intentions of central bankers. After all as BNP points out there now appears to be a shift in the stance of the Japanese government on the yen which could undermine the carry opportunity, BNP reports.
"The Japanese MOF (Ministry of Finance) has agreed that further yen weakness is not desirable, according to a report in today's Nikkei Kinyu Shimbum, suggesting that in future the MOF will use the wording 'watching markets carefully' instead of the more neutral phrase that 'FX needs to reflect fundamentals'.
Japanese Finance Minister Koji Omi has warned against 'one-way currency bets.'
The change in the stance of the Japanese MOF comes after the release of the 77th annual report of the Bank for International Settlements (BIS) warning that interest rates would have to rise globally in order to avoid a 'boom bust cycle.'
We expect equity markets to stay under pressure suggesting asset volatility will finally rise."
Higher volatility isn't in itself a bad thing but requires a more thoughtful approach to wealth protection. I suspect inevitably that is going to reduce gains from here to year end as portfolio managers seek to build in further protection. In a world where liquidity has supported all asset classes, the withdrawal of liquidity should favor cash and cash equivalents. At least higher rates mean you are also getting better rewarded for that strategy.
I have been on the road a lot the last few weeks, always good to get out of the studio and take the pulse. This week I am in Brazil recording a program about energy. Will report back with findings.
Good luck if you're active in these markets.