Central bank decisions from the U.S. and Japan are stirring the global liquidity pool, offering new considerations for investors. The U.S. Federal Reserve’s recent hike was expected and pushed policy rates to a 22-year peak of 5.25%-5.5%. However, the lingering question for market-watchers is about the possible number of remaining hikes before we see a pause and subsequent rate cuts, which the market is anticipating to commence in 2024.
Meanwhile, the Bank of Japan (BOJ) unexpectedly eased its yield curve control policy, raising speculation of potential shifts in Japan’s ultra-low borrowing costs. Although the BOJ has downplayed the possibility of drastic changes, this move has reverberated across the global market.
The BOJ decision holds particular importance due to its potential ripple effect on global sovereign debt markets. Given that sovereign debt yields are effectively interchangeable due to the presence of interest rate swaps, a rise in these yields could place pressure on U.S. bond markets, with possible spillover effects on equities. This policy shift could contribute to a yield curve steepening, potentially pulling domestic capital away from global markets and triggering a transient contraction in global liquidity. This change, in turn, might particularly affect long-duration assets across the globe.
The oil market is on a roll, set for its longest run of weekly gains in over a year, trading near $80 per barrel, being propped up by strong U.S. economic growth, something that central bank decision makers are assuredly watching closely just as disinflation has begun to manifest in the core inflation basket, excluding food and energy.
On the bitcoin front, trading volumes have dipped to a 30-month low, with price hovering consistently below $30,000. However, it’s plausible to expect a surge in trading activity and volatility in August and September, driven by pending U.S. regulatory decisions on spot ETF applications. With exchange balances drifting to new lows, as well as a flurry of regulatory decisions expected to come down the pipe in the next few months, one shouldn’t be surprised by a violent break from the current trading range, in either direction, likely chosen by the intermediate direction of risk markets. With the long duration bond yields creeping near cycle highs, equity markets are pricing in quite the disconnect.
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