We have argued for some time that central bank policies – while perhaps necessary from a political and mandate perspective – have been a pervasive force in distorting both asset prices and risk. It is possible (indeed probable) that the limits of this distortion are being tested. That is arguably why equity markets peaked in price terms around a year ago – despite more QE (in the case of Europe and Japan), and a dovish Fed (in the case of the US). Given this, the risk around asset prices at present would seem asymmetric. Strong growth, that potentially encourages higher rates, or weaker growth that raises recession concerns, are both highly problematic scenarios. Even the ‘more of the same’ scenario, that keeps central banks on the stimulus path, is unlikely to propel market prices higher given the potential that the limits on the ability of QE to push up risk asset prices is being tested. This is “Not a time to ‘set and forget’” (VIEW LINK)
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