Markets Have To Increasingly Price In The End Of Cheap Money
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BUSINESS INSIDER: What is the most exciting trade out there right now, in your opinion?
MARTIN ENLUND: As a Scandi-focused strategist, I like flattening the SEK money market (FRA) curve outright, or vs. Euribor, or why not buying SGBs vs. e.g. Bobls - Swedish bonds are cheap given the Riksbank's clear attention to short-term inflation.
BI: What has contributed most to the euro's rise over the last two years, and what are the key factors driving its current strength?
ME: I think one of the key drivers have been, and still is, private and official accounts reallocating into Europe (and partly out of EM). With the consensus still widely convinced of a "no-growth, no-inflation and no-rate Europe," this process has further to go.
BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?
ME: Aside from the obvious candidate of geopolitics, I think signs of U.S. inflation in conjunction with a Federal Reserve not accepting an overshoot of inflation would be bad news indeed. Such an outcome would more or less put the Greenspan/Bernanke/Yellen put on hiatus. I do not see that happening just yet though.
BI: What do you perceive to be the most misunderstood trend or event in or characteristic of today's markets?
ME: The nature and effects of Fed QE. Tapering is tightening. I overall believe the Fed's road toward monetary policy normalisation will be a fairly tumultuous one, given that more or less no one, including Bernanke himself, is quite sure how QE works - if it works at all.
BI: What pieces of new information (e.g. economic data releases, FOMC, price action in a given market over the next few days/weeks, etc.) do you think have the biggest potential to alter your outlook?
ME: The FOMC decision is key - see above. I'm not at all worried about the $10 billion tapering with regards to rates or the G10 FX space. However, a not-soft-enough statement should mean markets will have to increasingly price in an end to cheap money, which is likely to have broad and negative consequences for all things risky - headwinds for both PE ratios as well as the credit space.
Editor's note: This Q&A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Tuesday morning. Sign up below to get the newsletter and more of these interviews in your inbox each morning.