Divergence of monetary policy breeds instability: Nikko
Diverging monetary policy paths being taken by the US Federal Reserve, and other central banks around the world, are driving instability in the market, Nikko Asset Management global rates and currencies strategist, Roger Bridges, believes.
Bridges said the US Fed and the European Central Bank (ECB) needed to get on "the same page" if they are to stabilise international markets.
"The fact is that 99 per cent of central banks [around the world] are either easing, looking to ease or on hold, while one central bank is saying ‘we're going to tighten'," he said.
"That's creating a major problem for the world in the fact that the US dollar keeps on going up.
"The majority of commodities are tied to the US dollar, and in fact it's no coincidence that commodities started falling when the US dollar started rising in July 2014.
"A lot of the risks that we talk about are tied to the Fed and how the market perceives — and how the US dollar is reacting — to these divergences of monetary policy, because at the same time we've got the Fed seeming to be tightening or have been tightening over the last 18 months.
"The markets have been preparing for it, at the same time they know that the ECB, the Bank of Japan and everybody else is going to try to keep their currency down, so there's only one currency that can go up.
"If you got the Fed and the ECB on the same page, then we may see more stability on the markets, because then we won't have this divergence of monetary policy.
"Personally, I think the divergence story is giving instability and should last… the trouble is it can last longer than what I believe it actually should, but the natural solution is for all central banks to go to the same page, and that may be that they're all cutting rates or they start to go up… that's when stability will come back."
Recommended for you
Financial advisers will have access to private equity investments run by WTW for the first time as it launches a pooled fund to provide savers with access to traditionally institutional assets.
Three solutions providers – Betashares, Franklin Templeton and Russell Investments – have all launched new ETF products, including one range which uses gearing to help build wealth.
Platinum Asset Management chief executive, Jeff Peters, has shared a progress update on its newly announced turnaround strategy.
There is a role for advisers using inflation-linked bonds in portfolios, according to AXA IM, as the possibility of higher inflation necessitating another US rate hike is not out of consideration.
