The outsized market reaction last Wednesday to European Central Bank President Mario Draghi’s rather anodyne comments on the stance of ECB policy neatly illustrated the continuing heightened sensitivity of asset prices to perceived shifts in central bank policy. We were not surprised by Draghi’s comments – he has already signalled that tapering is likely – but we were surprised that markets were surprised. Clearly the threat of tapering has become a little more credible to investors recently. We return to this theme of central bank credibility in the first of our articles, in which Cedric Scholtes and Daniel Morris examine the large divergence between market expectations of Federal Reserve policy, and the Federal Reserve governor’s own views of future federal fund rates – the so called “dot plot”. The markets do not believe that the Fed will raise rates as much over the next few years as they themselves are telling us that they expect to do. Cedric and Daniel review possible explanations for this divergence, and draw some tentative conclusions about possible investment implications.
Emerging markets are a regular theme in our Intelligence Report editions. This year’s outperformance of EM equities has been notable. Even more notable has been the significant outperformance of EM IT, which has rallied 38% so far this year to become the largest single sector in the MSCI Emerging Markets Index. Guillermo Felices and Lydia Rangapanaiken analyze this phenomenon, identifying four key drivers, and drawing some conclusions about the longer term potential of this secular theme.Download to read more