Read the full Month in Review Newsletter here
Jackson Hole - Modern central banking at its finest
Jackson Hole, which is an annual gathering of central bankers and economists came and went. Investors were looking to US Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi to shed some light on their plans to reduce the size of the Fed’s and ECB’s respective balance sheets.
Unfortunately investors were left disappointed as Yellen focused on defending the progress made in recent years on regulation and the dangers present in de-regulation – which is in stark contrast to President Trump’s ambitions to loosen business regulation. Ms Yellen potentially talked herself out of her job, which comes up for renewal next year. Mr Draghi delivered yet more disappointment by not outlining his tapering plan (reducing central bank purchases of bonds) but only commenting on the rise of the Euro as complicating the process.
We guess investors will have to wait until the next Fed meeting on September 19 and the ECB meeting on the 7 September for more direction. Currently the market is pricing in 26bp of rate rises in the US to December 2018, whilst the Fed in June was predicting 1 more rate rise in 2017 and 3 in 2018 (~100bp); clearly there is a gap with what the market is pricing and what the Fed is communicating. Hopefully the September Fed meeting will provide more tangible market information than Jackson Hole did!
Sabre rattling between the US and North Korea continues over August as North Korea fired several short-range missiles into the Sea of Japan as well as a long range missile over Japan. The provocative actions from Kim Jong-Un challenges recent efforts to find a peaceful resolution to the Korean Peninsula tensions. President Trump responded that threats from North Korea "will be met with fire and fury like the world has never seen".
Political tension escalated and treasuries yields were bought lower as investors sought a safe haven asset, the volatility index spiked higher and then retreated over the subsequent trading days. Overall market financial markets volatility remains well below longer term averages in 2017.