Markets ‘no longer listening’ to Fed

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Markets ‘no longer listening’ to Fed

The US Federal Reserve (Fed) has “lost its mojo” and may have missed its chance to raise interest rates, according to Omar Saeed from Legal & General Investment Management (LGIM).

The strategic bond manager, who took over the £1.1bn Legal & General Dynamic Bond trust in June this year, said investors were “no longer listening” to the central bank’s policy pronouncements as a result of ongoing confusion over its intentions.

The US central bank opted not to raise rates from their historic lows of between 0 and 0.25 per cent in its September meeting. Market participants had been split 50/50 as to the likelihood of the first hike since 2006.

But the latest delay has once again forced some investors to recalibrate their expectations, with December now seen as the most likely date for the Fed to make its move.

Mr Saeed is not, however, convinced a December rate rise is on the table. He noted the central bank’s announcement would arrive just five working days before Christmas and hence would not give markets enough time to digest the move.

As a result, he thinks January is a more likely date for a hike. But by then, the manager anticipates worsening economic data will stay its hand.

He explained: “Europe hasn’t even felt the full blowback from the slowdown in China, which means neither has the US. I think by the time it comes to raise rates, there won’t be the economic data to support it, so they won’t be able to.”

Fed chair Janet Yellen struck a dovish tone at the September 18 press conference, pointing to growing risks from the China slowdown as one factor for not changing the rate.

The following week, however, Ms Yellen sounded more hawkish in a speech at the University of Massachusetts, saying the Fed was “still on track” to raise rates this year and declining to mention China at all.

These mixed messages have compelled investors to reassess the central bank’s reasoning, according to Mr Saeed.

“Yellen panicked and now people are no longer listening to what the Fed is or isn’t doing, but doing their own analysis,” he said.

“Central banks are losing their efficacy to drive markets. As investors increasingly discount the Fed ‘put’ and re-rate the state of global growth, that is likely to lead to a repricing lower of risk assets globally.”

Given this bearish view on markets, Mr Saeed has hedged “almost all” of his fund’s global high-yield exposure and sold down a significant portion of his allocation to peripheral European credit.

He added: “As liquidity is scarce, trading risk assets could be expensive. Therefore tactical and aggressive use of hedging instruments such as [the Markit] CDX high yield, iTraxx Main and Crossover [derivative indices] are used to hedge physical exposures and ultimately manage drawdowns.”

However, Mr Saeed said he was still finding the US corporate investment-grade credit market both attractive and significantly liquid.

Year to date to September 30, Mr Saeed’s fund has returned 3.1 per cent, while the Investment Association’s Strategic Bond sector has lost 0.2 per cent, according to data from FE Analytics.

The fund had previously seen outflows after former manager, Dickie Hodges, left the group and joined Nomura Asset Management.

The fund was £2bn in size when Mr Hodges departed in April 2014, compared to its current level of £1.1bn.

Investors speculate on the Fed’s intent

Robin Geffin, CEO at Neptune Investment Management

“Does Yellen know more than we do? Has China’s central bank been whispering desperately in her ear? These fears enabled markets to make real progress this year: a belief that China’s slowdown would not jeopardise aggregate global growth to a troubling extent.”

Rick Rieder, CIO of fundamental fixed income at BlackRock

“We would not be surprised if this Fed did not move for a while after its initial hike, and it will continue to be sensitive to the data when considering any changes. It is clear the Fed’s policy this cycle will be nothing like the historic tightening cycles of the past.”

Keith Wade, chief economist and strategist at Schroders

“Comparisons are being made with two years ago when the Fed decided not to taper following a tightening of financial market conditions. Today is similar, but the current Fed could well wait beyond January before lift off with March 2016 now the more likely date.”