The impact of
central bank asset purchases on the financial markets remains wholly dependent on investor psychology, particularly the willingness of investors to chase yield and to ignore any risk of capital loss.
For proof, however, we will have to wait to see what unprecedented
central bank asset sales will do to prices and to financial volatility.
One of the primary reasons for the extended period of market calm has been the influence
of central bank asset purchases (a.k.a. «QE» or «quantitative easing»).
While the BoJ has argued that
central bank asset purchases would not work in the absence of structural reforms, strategists said that high government debt levels will constrain fiscal expansion.
The new trends of worsening credit quality and
central bank asset sales are important for investors because they speak to the most appropriate asset allocation for where we are in this market cycle and the world's rising political risks.
Central bank asset purchases have smothered volatility and pushed investors to take greater risks, but we see potential for higher equity and bond volatility amid looming political risks and as the Fed presses ahead with higher rates.
Put simply, what happens to
central bank asset purchases and the Fed put once inflation reaches a level similar to Sonoco's pricing power (4 %)?