 "US bond yields may rise to 4% as growth revives in 2014")
After many years, the axis of global growth is going to shift back to developed economies. The International Monetary Fund (IMF) expects the global economy to grow by 3.6 per cent in 2014. This would primarily be led by the developed world, as emerging markets like China, India and Brazil continue to report slower growth. Developed economies have reported higher than expected PMIs in November, driven by increase in orders, with the exception of France and Spain. Data emanating from the US has also been more than encouraging. In November, jobless claims in the US fell to a five-year low of seven per cent. The Eurozone is expected to show moderate recovery in growth at 1.1 per cent in 2014, largely driven by Germany and Italy.
If growth is returning to the developed world, it would also impact financial markets, too. As the US Federal Reserve has been hinting, a pick-up in growth and positive jobs data will result in a reversal in monetary policy. The jobs data that came out on December 6 was the last piece of data to be released before the Federal Reserve meeting on December 18. Most economists do not expect the tapering to start in December. However, the impact of this could be offset by the loose monetary policy stance by the ECB and Bank of Japan. Credit Suisse believes divergent monetary policy would strengthen the dollar. "Interest rate spreads should thus move in favor of the dollar."
It's not just the US greenback that is slated to move upwards in 2014. Emerging bond markets have continued to see outflows in anticipation of the tapering of the bond-buyback programme as the yield differential between EM bonds and US treasuries has narrowed significantly. The US credit strategist at Bank of America Merrill Lynch, Priya Misra, expects US bond yields to rise to four per cent by end-2014 from 2.8 per cent currently. This would make emerging market bonds unattractive, after adjusting for risk premiums.
Strategists believe t a strong greenback and lower current account deficit in the US is negative for Asian equities. However, plenty of intertwining themes are expected to play out. Thanks to the policy uncertainty, several state-owned stocks in India and China have been beaten down, as risk premium rose on these. However, with policy uncertainty falling to its lowest levels in recent times, strategists believe there could be scavenging themes in India (policy ignition themes) and China (beaten-down state-owned enterprises). Bank of America Merill Lynch says the bloom is off Asia. The brokerage's Asia strategists believe there are pockets of neglect, revulsion and value, of which one is the "policy ignition" theme in India.
If growth is returning to the developed world, it would also impact financial markets, too. As the US Federal Reserve has been hinting, a pick-up in growth and positive jobs data will result in a reversal in monetary policy. The jobs data that came out on December 6 was the last piece of data to be released before the Federal Reserve meeting on December 18. Most economists do not expect the tapering to start in December. However, the impact of this could be offset by the loose monetary policy stance by the ECB and Bank of Japan. Credit Suisse believes divergent monetary policy would strengthen the dollar. "Interest rate spreads should thus move in favor of the dollar."
It's not just the US greenback that is slated to move upwards in 2014. Emerging bond markets have continued to see outflows in anticipation of the tapering of the bond-buyback programme as the yield differential between EM bonds and US treasuries has narrowed significantly. The US credit strategist at Bank of America Merrill Lynch, Priya Misra, expects US bond yields to rise to four per cent by end-2014 from 2.8 per cent currently. This would make emerging market bonds unattractive, after adjusting for risk premiums.
Strategists believe t a strong greenback and lower current account deficit in the US is negative for Asian equities. However, plenty of intertwining themes are expected to play out. Thanks to the policy uncertainty, several state-owned stocks in India and China have been beaten down, as risk premium rose on these. However, with policy uncertainty falling to its lowest levels in recent times, strategists believe there could be scavenging themes in India (policy ignition themes) and China (beaten-down state-owned enterprises). Bank of America Merill Lynch says the bloom is off Asia. The brokerage's Asia strategists believe there are pockets of neglect, revulsion and value, of which one is the "policy ignition" theme in India.