One would never expect the following dose of unstatus quo-like truthyness to come from Europe's mega bank (with a few tens of trillions of derivatives [5] on its books). Yet, that's exactly the source, courtesy of its best strategist, Jim Reid.
It’s not a market that rewards caution at the moment. The consensus view has not been an issue so far but will become more of one if an event arises that forces a few of these investors to turn. At this point there will be very limited liquidity and potentially very gappy markets. However for now the consensus positioning and their general desire to keep adding is helping credit. Our view continues to be positive on the asset class but mostly on the basis that central banks won't be able to withdraw stimulus very easily in 2014. Indeed the ECB and BoJ may be increasing it while the Fed may find it more difficult than most think to get from the $75bn/month now to zero. However as we've said a couple of times if we're wrong on central banks we may get bailed out by healthier macro conditions which also help spreads tighten. So in these artificial markets the percentages are skewed towards the bulls for now.
In our outlook we did think that setbacks might happen earlier in the year rather than later as markets interpreted pockets of strong data as a reason to doubt central banks liquidity. As the year progresses though, we think investors (and central bankers themselves) will be resigned to appreciate that markets are still vulnerable without them. The era of financial repression is in the early stages still not the late stages. Markets will need help funding at low yields for many years to come.
Yes they will...
