The final countdown
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CIO Thoughts: Autumn fog
Even though we still have one month to go we can already conclude that 2018 has not been an easy year for financial markets. Equity markets have been struggling while credit spreads have widened. In both cases, an increase in the cost of dollar funding – due to a move up in the UST yield curve and appreciation of the currency – played a significant role. In principle, the effect of higher US rates and a stronger dollar could be counterbalanced by a more optimistic investor assessment of the nominal growth outlook. After all, the latter is often the trigger for the Fed to become more hawkish. In some cases, the dollar could then even depreciate as more risk-loving investors move out of safe assets. Unless the market is concerned that the Fed has fallen behind the curve, the net effect for risky assets should then be positive. In the current environment it is hard to argue that US inflation expectations face a large risk of drifting upwards. This begs the question of why 2018 does not fit this script.
