Backup in rates reduces risk appetite
December was a turbulent month. Investors celebrated the slowdown in inflation in October and November, but lower inflation did not come along with lower rates in December. As rates backed up, the risk rally faltered.
- Global macro data is currently confusing and can offer some evidence to many points of view
- U.S. markets continue to show hopes of a soft landing founded on the idea that the Federal Reserve can cut rates as inflation comes down
- High global savings are contributing to a new higher interest-rate environment
- Improving strength in Europe and China will weigh on the dollar
- The Bank of Japan is widening the yield curve control range as it gradually exits its accommodative policy framework
This 10-year illustration captures the cyclicality of investors' appetite for risk.
March '16–Jan '18
Risk assets rally amid improving commodity prices, perceived stability in China's macro data, and expectations for gradualist Fed policy.
March '20–Dec '21
Easy monetary policies and reopenings supported risk assets.
Central bank tightening expectations along with the Russia-Ukraine crisis raise market volatility.
Source: Putnam. Data as of December 31, 2022. To create the Global Risk Appetite Index, we weigh the monthly relative returns of 30 different asset classes over 3-month T-bills relative to the trailing 2-year volatility of each asset class. The higher the relative return and the lower the volatility, the greater the risk appetite; conversely, the lower the relative return and the higher the volatility, the stronger the risk aversion.
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