Why risk assets need another shot in the arm

Equity markets have been caught in a gloomy place for much of May. Despite some gung-ho risk-on days, the overall trend for risk assets has been lower. Sean Corrigan from Diapason Commodities Management still thinks we might not be through the worst of the energy sell-off. But he says risk assets are looking for another “shot in the arm”. We should look for it in one of three places.

Firstly, China might decide that it has cooled its economy sufficiently and give up the inflation fight (or claim that it has been won). This could cause long-term damage to the economy, of course, but would be a boon for risk assets in the short term.

Secondly, we could see a change of heart from the Federal Reserve on withdrawal of monetary stimulus.

If we get a further run of weak data from the US and the political mood shifts, we could see the Fed finding reasons to be “easy again”.

And finally, if the Bank of Japan decides to help the Japanese government further with its rebuilding efforts, markets could see a green light for the Yen to carry trade once again and enjoy the cheap funding that results.

You would be forgiven if the suggested triggers for the “shot in the arm” do not fill you with confidence.

All three events, were they to happen, could mean a short term return to the races for risk assets, but long term they could all come back to haunt us.

Underlying economic weakness resulting in more stimulus does not fill me with enthusiasm.

James Altucher at Formula Capital in the US said this week that he sees the Dow heading towards 20,000. That’s a lot higher than we are now.

His view is not based on a new “shot in the arm” for markets but on the view that markets have yet to benefit from the previous jab.

He says we have not seen QE2 (the Fed’s soon-to-end second quantitative easing plan) really flowing into the markets yet because these relationships all work with a lag.

That may come as a big shock to those who have suggested commodity prices have been driven broadly higher this year precisely because of the “wall of money” coming from the US.

One of our viewers was so concerned with James’ call that he asked if he had been taking any illicit substances. James said he hadn’t, but he drinks a lot of coffee. One thing is clear, however: the full impact of QE on asset prices remains an area of acute debate. Time to watch these pesky risk assets like a hawk.

Anna Edwards co-anchors Capital Connection and Squawk Box

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