Economic historians are trying to draw comparisons between the bond sell off in 1994, 2003 and 2013, and what may happen if we get another sharp bond sell off in 2014 caused by the inevitable winding down of QE. In 1994 Alan Greenspan raised interest rates unexpectedly causing a sharp fall in bond and equity prices. When these concerns are raised with the Fed about the impact tapering will have on risk assets, their reply, “it will be different this time”. The Fed believe they continue to prepare investors for the inevitable day when they reduce the bond buying program, hoping that markets will adjust accordingly ahead of it. I think it is fair to assume that when the Fed do start to wind down the bond purchase program, yields will rise and equities could well react in a negative way. I wrote a week or so ago that Julius Baer believes the normalisation of yields will cause corrections, but these times will prove great opportunities. I included a long-term chart of the FTSE 100 and highlight 1994 and 2003; in both cases once the initial shock is overcome it led to a long extended bull run in equity markets.
In the spirit of paying more attention to the stories on the back pages of the financial press, as opposed to the ones on the front page, a report this week in the FT that the World Trade Organisation are poised to seal the first deal in over 10 years. Some analysts believe that a deal could add $1tn to the $18tn annual global trade. I have seen very limited coverage of this story so far, but should a deal be struck I imagine it will move from the back pages to the front.
This week was another muted one for equities; the FTSE 100 finished the week largely unchanged, as did the euro area. US markets despite the rise in bond yields, caused by the release of the Fed minutes, finished the week higher. This week is thanksgiving in the US; equity markets tend to rally during this week. There is a feel good factor ahead of thanksgiving, the time when families get together and this feel good effect tends to spill over into equity markets. The following Monday after thanksgiving is known as black Monday, it's regarded as the start of the Christmas shopping season, retailers release sales data and this data is used to judge the attitude of the consumer.