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Is there more pain in store for financial markets?

18 0 6

No pain, no gain. That’s the theory anyway, and something to remember for those whose New Year resolution was to get fit. For the markets, the question is: will perseverance reward investors battered by losses and volatility or is there more pain to come?

Fretting markets got ahead of themselves in December, fearing that a global recession was knocking at the front door despite the lack of any major signs that a material economic slowdown was imminent. Equity markets have rebounded in the first few weeks of 2019 as investors do some bargain hunting, but is this relative calm sustainable? The answer depends on a few key factors.

First, US monetary policy. The fading stimulus effects of the tax reforms against a background of already tighter financial conditions have the market discounting any further rate hikes. However, the Fed is likely to continue to raise rates this year, given that policymakers have obtained both their full employment and inflation mandates. The pace of tightening will depend on how fast inflationary pressures build and whether some of the political uncertainty diminishes.

Getting this balance right will be important for the Fed, lest it accidentally tips the US economy into recession, but it is acutely conscious of the potential for a........

© South China Morning Post