September could be month of risks, says BlackRock’s Thiel

The prospect of tapering keeps being key driver, according to Scott Thiel, deputy CIO of Fundamental Fixed Income and head of the Global Fundamental Fixed Income Team at BlackRock.

September is proving to be a month of event risks, ranging from economic data and monetary policy to the political and geopolitical, which have the potential to raise volatility in financial markets.

In fixed income markets, investors will be keenly watching US economic data, particularly tomorrow’s nonfarm payroll release, to try to find a signal for whether or not the US Federal Reserve will start to reduce its asset purchase programme.

The prospect of a reduction or ‘tapering’ of quantitative easing (QE) in the US, which is currently running at a total $85bn of treasury and mortgage purchases per month, has continued to be a key driver of fixed income markets with investors focusing on key data points and announcements pertaining to US growth and unemployment.

Many investors have priced in an expectation that Chairman Bernanke will announce a reduction in QE after September’s FOMC meeting on 18th September. The event risk around this is very high. As such, while we retain our short duration bias for risk free rates and our base case scenario is for tapering to commence this month, we trimmed some of these positions over the last few weeks to reduce risk ahead of the meeting.

Regarding today’s European Central Bank meeting, no changes were made to the current monetary policy tools and the main refinancing rate therefore remains at 0.5%. The Bank of England also elected to keep monetary policy unchanged, with the official Bank Rate also remaining at 0.5%. We have a short duration bias in both Bunds and Gilts given our view that over the medium term so-called ‘risk-free’ rates will continue to rise from their historically very low levels.

The German electorate go to the polls on 22nd September. So far polls suggest that Chancellor Angela Merkel looks set to retain her position but we are watching events closely, not least because the political debates and rhetoric may point to the issues that will take centre stage once a government has been formed.

Finally, there is currently significant geopolitical risk surrounding the stance of various countries, including the US, France and Russia, towards Syria. I do not want to comment more broadly on this tragic situation, other than to recognise the wide-reaching implications that an escalation of the conflict in the broader region could have on destabilising the region.

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