Last updated: 23:49 / Monday, 22 July 2013
According to ING IM

Looking Through the Fog, the Global Recovery is on Track

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Looking Through the Fog, the Global Recovery is on Track

Investors seem to need some time to get used to the new reality that monetary policy in the US and China has shifted to a less easy stance. Central banks try to support investors in this process by sending clear messages on their future policy intentions.

In our psychological market diagnosis it remains important to understand that more pessimistic moods often lead to underestimation of the possible good news to come. Therefore, it might be wise to start with the little discussed good news in the analysis of the balance of risks ahead of us.

European equities trade at a high discount vs. US stocks

Favourable economic indicators in developed economies
In sharp contrast to recent market dynamics economic data in the developed markets have surprised on the upside. To put it more strongly, economic indicators have been on a solid upward trend since the middle of May. This was driven by broad based strength in Europe (including the UK), the US and Japan. Unless the reappearance of market shocks (for example, full-blow crisis in emerging markets, renewed intensification of Eurozone crisis), it is likely that cyclical strength in developed markets will lead the global economy to higher growth grounds and thereby support risky assets across the board.

Markets have misunderstood the Fed
Various members in the Federal Open Market Committee (FMOC) made speeches last week in which they made it clear that markets had misunderstood the Fed. In particular, the pricing of the first rate hike in 2014 and a somewhat steeper profile of tightening after that was certainly not the message the Fed had wanted to send. On the contrary, quantitative easing and forward guidance should be seen as two completely separate policy instruments where the latter is the most clear and important expression of the Fed’s strategic game plan. As far as the latter is concerned, absolutely nothing has changed and the Fed itself still does not expect the first rate hike to occur before somewhere in 2015.

Guidance of level official interest rates by ECB
In the Eurozone the biggest concern for the central bank is to safeguard the fragile recovery in the region. On 4 July Mario Draghi tried to reassure investors by dropping a longstanding policy of never ‘pre-committing’ to future interest rate decisions. Actually, he now rules out any increase for an extended period.

To view the complete story, click the document attached.

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