Both of Wednesday’s much anticipated events, the budget in the UK and the result of the two day Federal Open Market Committee meeting brought much joy to bond and equity holders alike.
Dealing briefly with the budget it was all rather predictable, reiterate what a good boy George is by reminding everyone that our economy is one of the fastest growing G7 economies, mainly because the growth in the other six is pretty poor. The rest is an attempt to garner a few votes at from the less well off by raising the pressure on our overseas guests; a bit more bank bashing and once again raiding pension pots. What may well have had a greater influence on capital markets was the release of the latest MPC minutes, which were considered dovish in tone.
On the same topic the Federal Reserve, as widely anticipated, removed the word patience from the statement accompanying the rate announcement. What they did instead was to enter a list of caveats for why rates were not going anywhere fast, despite what the removal of one word might suggest. They could have just as easily left it in there and spared a lot of explaining. Ahead of the press release there were plenty of doom-mongers warning of the potential reaction to the markets if investors felt the removal of patience was a precursor to the first rate rise. One gets the distinct impression the Fed were as worried as anyone and hence the accompanying comments. It would also appear the Fed are as still as unsure as to when to make the move as the rest of the world is. For the near future anyway it looks like the Fed and the Bank of England are in no mood to move on rates.
Those who fear all this cheap money is continuing to fuel asset bubbles will not be any less deterred by the events of this week. The sharp rise in the equities on Wednesday evening in the US that accompanied the fall in the US dollar and rise in bonds was probably as much to do with short covering as much as anything in our view. It felt like a bear squeeze as traders correctly predicted the removal of the patience words, but underestimated the lengths the Fed would go to ensuring that markets did not translate this into preparing for a rise in rates.
As we enter the final week of the first quarter of the month, Global equities in US dollar terms are up 3% and bonds down about the same amount, commodities down nearly double digits. Japanese equities are the standout up 11% again in US dollars.