All Posts Tagged: Switzerland

Investment Insights: Powell’s plan points to prescription policy

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Federal Reserve building (Washington DC) at dusk.Both stocks and bonds sank on Tuesday when Jerome Powell debuted as Fed Chair at the semiannual Monetary Policy Report to the Congress. Overall, Powell’s testimony was fairly optimistic on the U.S. economy, citing job gains and rising payrolls.

Inflation has been a stubborn topic for the central bank, but the persistently low readings are still being chalked up to transitory influences, which should disappear over time. Powell went on to discuss the Fed’s policy and how “rule prescriptions” may be helpful. Our Bank of the West Economics team touched on this subject in a recent update, writing that “[Powell] also talked more than Janet Yellen did about the usefulness of monetary policy rules like the Taylor rule, suggesting again that he might be open to a more aggressive rate hike path going forward than the former Fed Chair.” As lawmakers were assuaged that he would balance growth without letting the economy get too hot, markets were more focused on his wording about the path for interest rates.

The bullish tone in the report seemed to be a double-edged sword as it evidenced a stronger domestic economy, but also that the Fed may need to reassess its pace of tightening and raise rates faster; the chance of a fourth hike in 2018 climbed to 34%, according to market implied probabilities calculated by Bloomberg. The S&P 500, Dow Jones Industrial Average, and NASDAQ Composite all dropped over a percent on Tuesday even after starting the day higher. Bond markets also seemed to strike a hard realization as the 10-year Treasury yield jumped 6 basis points to 2.92% before ending the day at 2.89%.

In the land of cryptocurrency, it seems that one government could be joining the fray. Switzerland, who’s fiat currency, the franc, is widely used as a safe haven asset during times of volatility, should launch a counterpart cryptocurrency known as the “e-franc,” according to Romeo Lacher, Chairman of SIX Swiss Exchange – the principal stock exchange of Switzerland that is also owned by Swiss banks. Lacher believes the introduction of the government-backed cryptocurrency could add substantial upside to the economy, and Swiss Economic Minister Johann Schneider-Ammann has said the country wants to be the “crypto-nation.” The idea will likely meet significant hurdles in regulation and backing from other officials due to the illicit activities associated with cryptocurrency along with the significant swings in value.

The GIM team has reviewed our stock exposure alongside fixed income duration in our strategies. Our baseline forecast for interest rates continues to reflect three rate hikes in 2018; however, a fourth hike may become necessary as the economy continues to strengthen. We continue to believe that equity markets will outperform bond markets given the positive economic footing and robust earnings momentum in recent quarters. Our team strongly believes alternative investments will play a substantial role in portfolio construction over the coming years. Going forward, we will continue to evaluate potential risks, but for now investors should keep an even keel.

Table showing various market returns as of 2/27/18

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

 

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U.S. Outlook: Deflation fight moves overseas

Scott Anderson
Chief Economist
Chart showing US dollar-to-euro price ratios over recent years.

Global central banks from Europe, Canada, Peru, Switzerland, Denmark, and India all made moves this month to loosen monetary policy and head off economic and deflation risks.

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