Follow Joshua McCallum
Joshua McCallum is the senior Fixed Income Economist at UBS Global Asset Management, where he provides economic analysis to support and challenge portfolio managers. Before joining UBS in 2005, Joshua worked for the UK Treasury, dealing with an eclectic range of topics including international macroeconomics, the UK budget, economic reform in Europe, and post-conflict fiscal policy in Iraq.
The market moves for reasons that are not always justified by the economic data, as seen in last week's risk sell-off. The market correction seemed to be driven by a re-assessment of the global growth outlook. And the sharp fall in the oil price was taken as a sign of slowing global growth. Recent economic data does not seem to support such an abrupt correction; it is likely that unwinding of speculative positions might have played a bigger role in the drop in both oil prices and the financial markets.
The USD has just experienced one of its larger three-month appreciations of the last 30 years. Currency appreciations are often driven by growth or, in the case of the USD, by fear. Some doves in the Fed have started to suggest that a stronger currency is a good reason for caution on rate hikes, but since a stronger currency can be a reflection of expected future tightening it is hard to figure out which should come first.
Regulations have incentivised banks to de-risk their balance sheets and reduce lending to the private sector. In Europe, the regulatory environment and firms' reliance on bank lending make it unlikely that a fully-fledged QE programme would have the same expansionary effects as it has done in the US or UK. The ECB introduced a programme of ABS purchases but there are obstacles to implementing this. Government guarantees may be needed to kick-start the ABS market and prevent credit growth from stalling.
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