From Thompson/Reuters' Alpha Now:
On our central view, the US economy can handle a modest
tightening of monetary policy. But while the US may be ready for tighter
monetary policy, the rest of the world is not.
Asset prices are more correlated under QE than in normal times, and
the spike up in yields that followed the FOMC’s June meeting has not
been confined to US Treasuries. Sovereign yields have risen across
Europe, causing both the Bank of England and the ECB to fight back,
issuing ‘forward guidance’ in an attempt to convince markets that policy
rates on this side of the Atlantic will be on hold for a very long
time. And equities have suffered. Worst hit to date have been the
emerging market indices, which benefitted greatly from the ‘search for
yield’ that took place during the period of exceptionally loose monetary
policy.
The consequences for the rest of the world of a slowdown in the rate of
asset purchases by the US Federal Reserve are very different from those
of an increase in the Fed Funds rate. This is not a normal tightening.
When the Fed does taper there will be a reduction in the prices of many
assets, and not just those denominated in US dollars. Indeed, that
reduction is already underway....MORE
