16th August 2013
The global reach of US money policy has never been greater say Jupiter fund Miles Geldard & Lee Manzi.
In a note issued today, the managers of the Jupiter Strategic Reserve Fund and the Jupiter Strategic Total Return Sicav fund say: “The US may have seen a relative decline in its status as the world’s economic powerhouse but the country’s monetary policy still has global clout, particularly when it comes to the bond market.
“When the US sneezes, the rest of the world catches cold” was a common saying in the days when the USA was the main driver of the global economy. Today, this viral effect continues but now applies to the influence of US monetary policy brought about by the Fed’s massive liquidity injections and their impact on other parts of the world and global financial markets.
“The sharp fall in bonds in the second quarter, for instance, was simply due to the US central bank acknowledging there would come a point when it would need to reduce its bond buying programme known as quantitative easing (QE). The bank on the other hand made no suggestion interest rates would begin to rise but this message was drowned out by the increased fear provoked by the threat of an end to QE.”
The managers say the resulting fall in bond prices was particularly noticeable among emerging market debt – a sector they have felt for a long time was overvalued and over-owned, driven by the clamour for yield.
“Emerging market debt is particularly vulnerable to a quantitative easing exit strategy as bond spreads are low on foreign and local currency denominated debt, and the currencies can fall against a resurgent US dollar,” they say.
“Among developed markets, the US central bank may have made clear it has no immediate intention of raising interest rates but rates there will rise once the economy is on a sure footing. Over in Europe, whilst the Draghi put has resulted in stability for the region, significant structural issues remain and leave the market susceptible to a resumption of the eurozone crisis. French government bonds, in particular, are increasingly exposed to these risks given their extremely low yield levels which have been supported by solid buying by domestic banks and central bank reserve managers.”
The manager says that with US monetary policy such a major global influence, the outlook for the world’s largest economy remains key.
“We believe the ongoing recovery in the US housing market is likely to be a source of strength for the world’s largest economy at a time when the global growth outlook remains fragile.
“House prices have been rising and activity has increased. Absent a large rise in mortgage rates, which the US central bank is keen to prevent until the economy is much stronger and capable of generating more jobs, there is every reason to think the US housing market will remain a significant driver of the US economy going forward.”