The imminent release of the US Federal Reserve's July meeting minutes has spooked markets recently, with investors speculating that policy makers are looking to pull back, or taper, their quantitative easing (QE) programme of pumping money into the economy, according to Chief Investment Officer Haig Bathgate.
QE has never been implemented to this extent before, and has helped prop up the value of a range of assets. We're in unchartered territory as to what will happen when the stimulus is withdrawn, and which asset classes are most vulnerable. Today, that uncertainty led to early volatility for investments in India and Indonesia – they're seen as risky because both countries are importing more than they're exporting, essentially spending more abroad than they're earning.
Money coming out of those countries is probably heading back to the US. Not only do investors tend to repatriate funds when they become more fearful, but there are strong signs the US economy is recovering (the reason why the Fed is considering winding down its QE programme), which makes US assets relatively more attractive.
It's undeniable that QE has helped sustain the global economy through one of the most severe downturns the world has seen – the US is showing strength now partly due to this policy. But pumping money into the economy always carries the risk of creating bubbles, especially in those industries funded by consumer credit, such as car manufacturing and housing. Strong data in both of these sectors (US car makers reported their strongest monthly sales growth in June since the recession) will probably bolster the position of those in the Fed who argue that it's time to whittle down QE.
Haig was speaking on BBC Radio's Good Morning Scotland.
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