Global Liquidity Adjustments Suggest Speed Bumps Ahead
There will be global implications to the Fed’s normalisation of the federal funds rate due to the operation of fixed exchange rates, as well as changes in cross-border capital flows.
Sustained US current account deficits have produced huge outflows of dollars to create offshore markets to provide borrowing hubs for foreign entities which are currently susceptible to changes in US monetary policy.
Considerable uncertainty remains as to whether global liquidity can be boosted by a recovery in cross-border lending by Eurozone banks.
Global liquidity growth will be receiving less assistance from the European Central Bank (ECB) in 2018, as well as potentially the Bank of Japan (BoJ).
The term premiums demanded by investors in the sovereign bond markets of the US, UK, Eurozone and Japan have fallen courtesy of quantitative easing, but their future progression as central bank balance sheets normalise remains highly uncertain.
Global corporate bond markets continue to misprice credit and market risks, particularly as investors scramble for yield while easy financing conditions contribute to deterioration in credit quality.
US corporate bonds will face a challenging period in 2018 if there is inversion of the yield curve, because investors will raise their demanded default premium, particularly on high yield bonds.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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