In my day-job I am forced to write my economic outlook for the new year in December, alongside most other economists. This is part of a long-standing sell-side tradition, and at Christmas time, you don’t change traditions. The real way to do it, however, is to way a few weeks into January to see where the dust settles and how investors vote with their money in the early sessions of the year. I thus present the Alpha Sources version; five key questions for 2023, and as many answers. I’ll start with the war in Russia, asking what in fact Russia will achieve, if anything. I then ask whether 60/40 portfolio will rebound in 2023, and whether the leadership in global equities is changing. I then qualify my answer with a question on geopolitics and the free flow of goods and capital between China and the US, before asking whether Covid is over.
Read MoreA number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.
The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.
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