THE FIVE BIGGEST "MARKET CONUNDRUMS"
Change in market tone since September:
- From 2016 through August 2017, global interest and forex rates and stock prices were strongly influenced by 10y UST yield movements.
- This led investors globally to focus on US rates. However, since September this simple landscape has changed, creating headaches for bond, forex, and stock market investors.
Deutsche Bank recently highlight five conundrums (questions) and their proposed explanations for them. Rationally explaining recent market moves will be essential to forecasting next year's market.
DB's global financial research team's view is that “the current combination of:
- Strong economic conditions,
- Low interest rates,
- Low inflation, and
- Narrow credit spreads
... are supporting a rise in value of risk assets.”
“If the risks (such as difficulties with negotiating a higher US debt ceiling) do not materialize, and conditions remain stable (though the path would gradually narrow), then risk asset prices will likely keep rising."
The key focus for 2018 will be the sustainability of low interest-rate/spread/volatility conditions and the Goldilocks market
THE FIVE MARKET CONUNDRUMS
- Question 1: Japanese stocks' divergence from our approximation model (US stocks/forex)
- Question 2: Ongoing stock rally (rise in P/E due to decline in risk premium)
- Question 3: Ongoing yield-curve flattening
- Question 4: Ongoing decline in interest-rate and stock-price volatility
- Question 5: Ongoing tightening in credit spreads