Re-election will bring more QE
Managers believe that Barack Obama’s re-election will be followed by more quantitative easing, as he continues to pursue policies of central bank intervention into the global crisis.
Jack McIntyre, global bond portfolio manager at Legg Mason, said that the Fed’s current programme of $40bn (£25bn) a month of quantitative easing could more than double during Mr Obama’s second term.
“We have reduced our US dollar exposure due to quantitative easing and we think president Obama will continue buying long-dated treasuries. The $40bn programme could turn into $85bn.”
The manager speculated that, had Republican candidate Mitt Romney won, Mr Bernanke might have eventually been replaced by Stanford University’s John Taylor, who could have upped interest rates.
“Mr Romney was going to reduce the regulatory environment and that could have also brought about a stronger dollar and been better for markets. If Mr Romney had won we would have been more open to increasing our dollar exposure,” he said.
Thanos Papasavvas, a fixed income and currency strategist at Investec Asset Management, agreed that US quantitative easing would probably continue – and markets will rally.
“We believe that under the Obama administration, the Federal Reserve, under Ben Bernanke, will maintain the record low levels of interest rates until 2015 and do whatever is necessary to provide a stable economic recovery,” he said.
“On any signs of economic pick-up our expectation is that Mr Bernanke is likely to verbally intervene in order to keep yields anchored and avoid any excessive exuberance derailing the yield curve and therefore the economic turnaround.
“For that reason I remain optimistic for risk assets in general, and would not be too bearish on US government bonds.”
Looking ahead, almost all commentators are united in the view that the impending ‘fiscal cliff’, a massive raft of looming tax hikes and spending cuts, is the biggest economic challenge now facing president Obama.
Nick Cowley, co-manager of the Henderson Horizon American Equity fund, said the event, which would likely plunge the US back into recession, will be narrowly avoided.
“In the final presidential debate, Mr Obama said that these spending cuts would not happen, and general consensus is that many of the tax increases will be pushed out to be potentially dealt with in a broader fiscal reform package,” he said.
In his victory speech, Mr Obama said he hoped the two parties “can work together to move this country forward,” a comment taken as a positive for the economy, which is once again facing a Democrat-led senate and the Republican-dominated Congress reached a compromise.
Andrew Cole, multi-asset manager at Baring Asset Management, said that it was vital for market confidence that the two sides set “general targets” for revenue increases, to improve the US balance sheet.