The equity and capital markets responded very positively in September when the US Federal Reserve postponed the cutting-back of its bond …
Swisscanto Investment Update October 2013
purchases. But postponed is not cancelled! In our view, the markets have been granted a temporary reprieve until tapering and withdrawal of liquidity once again return to the fore. We will use the interim period to have a slightly increased equity allocation and to reduce our underweight position in bonds.
There was also a political tailwind for the markets due to President Obama holding back on a military strike against Syria as well as the agreement on a UN Security Council resolution on Syria. However, the deferred tapering was the decisive factor behind the unusually positive market developments in September, which is often a difficult month for the stock market. The Fed is continuing to buy bonds to the tune of USD 85 billion a month. The justification for this was that the US economy remains reliant on this monetary boost for the time being. The US economic data partly revealed the desired acceleration in growth: as far as the early indicators are concerned, in particular with regard to orders, there is a strong trend. By contrast, the keenly observed decline in the unemployment rate (currently 7.3 per cent) is not only attributable to the economic rally but also, for the most part, to a rapidly declining participation rate. Since the last recession, more and more Americans have completely removed themselves from the job market. Conclusion: instead of elegant forward guidance, we have seen the Fed’s verbal toing and froing which feeds fears that the departure from the extremely expansive monetary policy could become a serious problem.
Bonds: Rising yields corrected
The deferral of tapering also led to price gains on the capital markets. Emerging markets bonds, which came under strong selling pressure particularly during the summer months, were the main beneficiaries. Bonds in the Swisscanto Balanced Portfolios remain underweighted – however the underweight is being gradually reduced.
Currencies: Gains made on carry trades
September turned out to be a good month for carry trades, after commodities and emerging market currencies had been under pressure in previous months. We closed our New Zealand Dollar/Japanese Yen trade.
Equity markets: Strong momentum
In the US and Germany, the market indices reached new historical highs in September. The recovery in the equities markets continued across Europe as well. Against the backdrop of the economic recovery of the eurozone, which will carry on for several years, we expect the continuation of strong stock market performance in the medium term in Europe. In the short term, the rally in the stock markets is sustained in many areas not so much by fundamental but by technical factors such as a strong momentum. Possible disruptive factors such as the disagreement about the next US Federal budget set to come to a head again in October and the further raising of the debt ceiling are also looming. Many investors are therefore hesitating about purchasing equities – all the more so when prices are close to record levels.
Source: ETFWorld – Swisscanto
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