Financial markets cannot be viewed in isolation
No financial market can be looked at on its own when examining how it operates and its potential for investment opportunities because money is currently flowing very easily and very readily across national borders, according to the chief economist of a leading research house.
Speaking at the fourth annual Breakfast with the Economists presentation, Standard and Poor’s (S&P) chief economist David Wyss said: “You can’t talk about any national financial market because financial markets are part of a world market.”
Wyss cited the recent movements of both short and long-term interest rates in the US to illustrate this point.
“The Federal Reserve has now raised the federal funds rate by 4.25 percentage points since the middle of 2004. Long-term bond rates over this time have barely moved. During the second quarter of 2004 the long-term or 10 year bond in the United States was trading at 4.8 per cent. It closed yesterday at 5.0 per cent,” he said.
“That’s not the way it’s supposed to work. Usually when short-term rates go up, long-term rates go up with them, maybe not as much but they should go up. It’s just another illustration of how you can’t talk about the US bond market by itself anymore,” Wyss added.
He believes the breaking down of financial market international boundaries has been exacerbated by investors’ perception of diminished risk in regard to items such as foreign currency. Wyss feels this mood in the market is cause for concern.
“The problem is that central banks have convinced people that there’s not as much risk as there used to be. Every time the [US] dollar has started to decline you have the central banks, mainly in Asia, jumping in with massive intervention to support the dollar,” he said.
“That’s sort of convinced fund managers that the central banks will keep them whole, or at least slow the process down enough so they’ve got time to get out of their positions, before they lose too much money,” Wyss explained.
“This lack of perception of risk in the market scares me,” he said.
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