Speaking on the Brewin Dolphin Podcast, Reid, head of global credit strategy at Deutsche Bank: “I still struggle to see how they will go much higher than that in 2016, with everyone else easing. There are still structural issues everywhere. Is it a policy error? I think I have moved from thinking the policy error is more immediate, ie it will upset markets immediately, to thinking that it is a policy error over kind of 12, 24 month period.
According to Gutteridge, the Fed is unlikely to hike only once, therefore it’s a hike in December could be the start of a cycle of normalisation. “It looks like they are pretty determined to go quite firmly in the opposite direction. The differentials between what’s happening at the Fed and the ECB are quite stark,” said Gutteridge.
Reid agreed and explained that the dollar is moving rapidly against the euro, which could set off a reaction of negative events. “A lot is priced in towards the euro in terms of the respective policy actions. By design they tried to make the first hike a fairly dovish one,” said Reid. “The Fed needs to move closer to the market”, he added.
In terms of asset prices, Reid says that European equities are better placed than US equities at the moment, while Japanese equities are “still relatively safe”. “Credit markets are in pretty bad shape, really. US high yield has widened this year, which is quite a big move,” said Reid and went on to explain that energy is a big component in this development.
In Reid’s view, European equities will still go higher because of what the ECB is doing. He believes next year will contain opportunities in European equities.
