22 Apr 2014

BlackRock Investment Institute

 

Risk assets took a breather and bonds outperformed in the first quarter, as the US Federal Reserve started winding back its monetary easing. Japanese and emerging market equities were among the biggest losers amid jitters the Chinese economy is slowing – yet EM currencies staged a comeback. See the table below.

Monetary policy remains a key driver of market returns. Fed Chair Janet Yellen in March indicated the Fed could raise interest rates as soon as six months after the end of quantitative easing (QE). This led to a flattening of the US yield curve, as markets concluded the central bank may hike rates as soon as early 2015.

Volatility rose and looks set to rise further as the era of easy money draws to an end. The Fed is reducing its asset purchases month by month, the European Central Bank’s (ECB’s) balance sheet is shrinking as banks repay their long-term refinancing operations (LTROs), and the Bank of England (BoE) is on hold. Many emerging market central banks have raised interest rates to stem currency declines. The Bank of Japan (BoJ) is the only major central bank going full steam ahead with QE.

 

Global Market Snapshot

 

 

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