Senior Fixed Income Strategist
For many, this is the first week back at work after a relaxing summer holiday. As such, I feel it is our duty to be clear on what is happening in the market: this is the beginning of the long-awaited crunch caused by the same money that so aided the old and new world during the 2008-7 crisis.
The only difference this time is that the narrative contains no real ‘bad guys’ (read: Lehman et al.). Instead, we have a bunch of ‘good guys’ whose good intentions have allowed a potentially explosive situation to develop.
Help without a clear recovery path
Since the financial crisis and the 2013 European peripheral debt crisis, the Federal Reserve and European Central bank have put an enormous amount of money into the system to avoid a domino effect of defaults that would ultimately see SMEs and weaker corporates cut off from financial markets.
This strategy worked well in one sense because the economy was able to recover; defaults decreased to historic lows and just when inflation started to pick up, central banks began to hike interest rates and discuss ending quantitative easing. Stopping QE, however, means that central banks need to disinvest the same money that has thus far supported equity and credit valuations. The hope is that the market won’t notice; the reality is that we cannot simply ‘rewind’ to pre-crisis circumstances and withdrawing this money will leave a huge hole in the market, making it more vulnerable to volatility.
We are just at the beginning of this balance sheet disinvestment plan (see figure one) and we are already seeing signs of distress arising from emerging markets. If this is the beginning of a crisis, will the Fed have enough ammo to manage a crunch?
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
