Fears of Fed's exit from QE might be overdone

Worries about the Fed scaling down its massive liquidity-injection programme might prove to be premature. With recent disappointments in US economic data such as the ISM (Institute of Supply Management) manufacturing index, which fell to the lowest level since the recession, and expected weakness in job data at the end of the week, markets might have to rethink the pace of the QE exit. 

What we are witnessing now, in my view, is the market adjusting its expectation of the timing of the exit. A rapid rise in US bond yields in the past month started to attract money from equity markets. As a result, equity markets pared the lion’s share of the year’s gain and US bond yields started to come down in the past week. 

How long will this market adjustment last? One indicator I’ll keep an eye on is US long-term bond yields. The equity market is likely to go sideways until bond yields stabilise at a comfortably low level where the reallocation from stocks to bonds is no longer attractive. 

Meanwhile, gold is likely to benefit from this market correction. Amid weaker equity markets, falling bond yields and a weaker US dollar, gold is becoming more attractive as a store of value. The massive outflow from gold exchange-traded funds since the beginning of the year is abating. The world’s largest gold ETF, the SPDR Gold Trust, has recently recorded stable holdings. This might signal improving investor sentiment towards gold.

Looking beyond this correction, my bullish view on equity is still intact. US property markets are showing good momentum boosted by a low level of inventory and improving demands. Japanese corporate profits are expected to grow at an unprecedented pace due to weakness of the yen. Global economic conditions will remain on a growth path and provide support for stocks. For those who missed the last leg of the equity rally, this market correction might offer a great buying opportunity.

 

Komsorn Prakobphol is a senior investment strategist at Tisco Wealth. He can be reached via www.tiscowealth.com or [email protected].