Major central banks are no longer moving in lockstep.
In addition to continuing with its tapering program, the
Federal Reserve (Fed) may move to normalize interest-rate markets
earlier than some expect, given that recent strong economic data
- including last week's
reports - confirm that the U.S. economy is recovering at a steady
But while the Fed is moderating its monetary accommodation and
will likely start to raise rates
, other central banks are moving in the opposite direction.
Last week, given the growing risk of deflation in Europe, the
European Central Bank (ECB)
further eased monetary policy
. Included in its actions was a move to push short-term deposit
rates into negative territory, the first time a major central
bank has attempted this. The ECB's combination of rate cuts and
other measures, including a commitment to expand its arsenal if
necessary, add up to a significant easing of credit conditions.
Elsewhere, we believe the Bank of Japan (BoJ) is likely to
continue its own very aggressive asset purchase program through
As I write in
my new weekly commentary
, this growing divide has three implications for investors.
Low global interest rates in the near term.
Even as the Fed pulls back, global interest rates are likely to
stay low, and liquidity high, for the remainder of the year,
given that other central banks aren't following in the Fed's
footsteps. Relatively low rates - coupled with low inflation and
a recovering economy - should be
supportive of stocks
A stronger dollar.
To the extent the Fed is becoming less accommodative at the same
time that other central banks are maintaining very easy monetary
policy, the dollar is likely to strengthen. Weaker currencies
should be supportive of international equity markets, like
A positive for international markets
. An earlier-than-expected rate rise from the Fed would put
additional pressure on bonds, confirming
long-term preference for stocks over bonds
However, within the equity market, not all segments look
equally attractive. In particular, lots of liquidity from the ECB
and the BoJ should help support international equity markets,
such as Japan, which closed at a three-month high last week. As
such, I continue to advocate that investors look for value within
select international markets, like Japan and the Eurozone.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
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International investing involves risks, including risks
related to foreign currency, limited liquidity, less government
regulation and the possibility of substantial volatility due to
adverse political, economic or other developments. These risks
often are heightened for investments in emerging/ developing
markets or in concentrations of single countries.