Markets dancing to central banks’ tune

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By Marino Valensise, head of Barings’ Global Multi Asset Group

Baring Asset Management (Barings) believes that disappointing growth in the US has strangely benefitted equity prices and that expectations of an early interest rate rise by the US Federal Reserve have abated. As a consequence, Barings believes that global markets have become policy addicts and monetary policy rather than economic conditions is currently driving markets. This is evident in not just developed markets but also in economies further east, including China.

Notwithstanding, Barings remains convinced that unless the disappointing US growth seen in the first quarter extends into the second, the Federal Reserve will act in September.

In Japan, Barings believes that corporate profitability remains healthy and is spreading beyond export-led companies. In the Eurozone, stronger lending growth is on the horizon after better expansion of the monetary aggregates. While there has been mixed economic data in both regions, Barings sees real progress and expects both economies to be important contributors to global growth going forward.

Marino Valensise, head of Barings’ Multi Asset Group at Baring Asset Management, said: “The latest economic data releases have not been particularly exciting. We believe that this is simply a seasonal soft patch in line with the experience of prior years and have not changed our longer term projections for better growth later in the year.

“In the post-financial crisis years, central banks have done ‘whatever it takes’ to curtail market volatility, facilitate access to credit and engage in various types of financial repression, squeezing savers at the expense of borrowers through low interest rates. Economic conditions may improve to a point where those policies will have to be discontinued, or even reversed. Once this happens, there is a risk that what has been repressed will come out with a vengeance. Having constrained the cat inside the bag for so long, once the cat gets out there’s no telling what damage it might do.”

In Barings’ view, an improvement in US employment to potentially inflationary levels will drive policy action; however, two other aspects might influence in the decision to raise rates.

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