Changes in the market regime

Changes in the market regime
Changes in the market regime
© iStock
Share post:

The big trends of the past weeks such as the appreciation of the US dollar, the weakening oil price, falling yields, and the outperformance of Eurozone equities have reversed in the past days and weeks, in some cases drastically so.

What is behind all of this?

When both demand (i.e. economic growth) and supply (i.e. production growth) are weak and the central bank policies are very loose, we have a textbook example of an environment causing yields to fall and/or remain low. Indeed, yields were high after the Great Depression in 2008/2009. Having transitioned to a slow, weak, and fragile recovery, yields have started to fall and bond prices have started to rise (i.e. asset price inflation). Even if the economic regime remains unchanged, the market environment may change; the higher the asset price, the lower the expected return or yield.

The valuation indicators for bonds and the US dollar have in fact suggested lower future return rates. At the same time the positioning of many investors has been asymmetric, i.e. it has come with a focus on falling yields and an appreciating US dollar. Also, bond liquidity is lower than prior to the crisis. This combination of factors has caused an increase in the susceptibility to corrections.

The candidates that triggered the trend reversal are best summed up by the reduction of the risk of deflation (i.e. permanently falling wages and prices). Economic growth in the Eurozone has improved, the increased oil price has led to a slight increase in inflation, and the signs of an acceleration of wage growth in the USA have become more plentiful. The market therefore maintains its expectation of the beginning increases of the Fed funds rate in the USA.

At this time the drastic movements in the market are not heralding a change of the economic environment (yet). On the contrary: low yields and rates of return and temporary countermovements fit the picture of this regime. The very loose monetary policies exacerbate these features. There are neither signs of a significant, sustainable improvement of global economic growth (i.e. demand) nor of an increase in productivity growth (i.e. supply). However, with prices already very advanced, it does not take much for a countermovement to set in. The market environment has changed. The “Japan scenario” is now priced in.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH.Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version.Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.