Having been away for a few days and returning after a debate, I came into work today expecting allocations to change, hedges to move and stop-outs to be executed.
Fortunately, none of that happened. I said fortunately, not unfortunately, in case you missed that.
The Federal Reserve’s plan of unbounded quantitative easing and the European Central Bank’s plans to buy as many bonds as needed have certainly worked. The fact that the basic economic issues facing the world remain as large as ever cannot take anything away from the central banks—for now.
Here’s how I see things playing out for the next month. I know, I know: a coach whose team is ahead shouldn’t be making forecasts to the TV reporter on the sidelines; it’s the ultimate jinx. But I can’t resist.
U.S. economic growth picks up a tad but remains around 2%. U.S. rates give a little ground, but remain lower than 1.8%; Spain asks for a program in Q4 and European growth continues to be negative; China grows at 6% to 7% with no immediate action on the part of policymakers to goose growth; equity prices and credit spreads stall out not too far from their current levels; overall volatility remains low.
Pretty much consensus view, you say? I agree. But you have to recognize the fact that when policymakers have the upper hand and are winning the near-term battles, consensus view is going to reign supreme. It’s when policymakers start losing ground that we need to switch gears. What could happen in the next month or so to upset the status quo? Spain not asking for an M.O.U. (a.k.a. memorandum of understanding) or U.S. growth being much better than expected. But I assign low probability to either of these.