Major central banks are no longer moving in lockstep.
In addition to continuing with its tapering program, the Federal Reserve (Fed) may move to normalize interest-rate markets earlier than some expect, given that recent strong economic data – including last week’s labor market and manufacturing reports – confirm that the U.S. economy is recovering at a steady pace.
But while the Fed is moderating its monetary accommodation and will likely start to raise rates by next year, other central banks are moving in the opposite direction.
Last week, given the growing risk of deflation in Europe, the European Central Bank (ECB) further eased monetary policy. Included in its actions was a move to push short-term deposit rates into negative territory, the first time a major central bank has attempted this. The ECB’s combination of rate cuts and other measures, including a commitment to expand its arsenal if necessary, add up to a significant easing of credit conditions. Elsewhere, we believe the Bank of Japan (BoJ) is likely to continue its own very aggressive asset purchase program through 2016.
As I write in my new weekly commentary, this growing divide has three implications for investors.
Low global interest rates in the near term. Even as the Fed pulls back, global interest rates are likely to stay low, and liquidity high, for the remainder of the year, given that other central banks aren’t following in the Fed’s footsteps. Relatively low rates – coupled with low inflation and a recovering economy – should be supportive of stocks.
A stronger dollar. To the extent the Fed is becoming less accommodative at the same time that other central banks are maintaining very easy monetary policy, the dollar is likely to strengthen. Weaker currencies should be supportive of international equity markets, like Japan.
A positive for international markets. An earlier-than-expected rate rise from the Fed would put additional pressure on bonds, confirming my long-term preference for stocks over bonds.
However, within the equity market, not all segments look equally attractive. In particular, lots of liquidity from the ECB and the BoJ should help support international equity markets, such as Japan, which closed at a three-month high last week. As such, I continue to advocate that investors look for value within select international markets, like Japan and the Eurozone.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.