Synchronized tapering of global central bank stimulus programs could prompt more volatility in equity and corporate and sovereign bonds, Citi global macro strategists said in a research note Monday.
Exploring current market themes, Citi’s Jeremy Hale, Maximilian Moldashl, Amir Amin, Jamie Fahy and Skylar Montgomery Koning added that there was no need for a “bear market.”
Synchronized reductions of asset purchases by central banks, a process known as tapering, and the tightening of monetary policy, increasing interest rates, had several implications for markets, they said.
“Of course, only the Fed (U.S. central bank) is acting to reduce its balance sheet yet. The ECB (European Central Bank), BoJ (Bank of Japan) etc. are merely expanding the balance sheet at a slower pace than before. But the flows are easing into asset markets,” the strategists said.
“Monetary tightening via interest rates is also still mainly a Fed story so far with sporadic support elsewhere.”
Nonetheless, when looking at the implications of “synchronized tapering” by other central banks, the strategists said there was a “high likelihood of equity market corrections, though not necessarily greater than in pre-taper periods” and “higher implied and realized volatility of risk assets including equities and both corporate and sovereign credit spreads.”
However, they believed there was “no need for an equity bear market.”
The strategists noted that ECB tapering would drive euro appreciation as a result of reduced flows of foreign investment funds to the rest of the world, especially the U.S. “The latter likely adds to upwards pressure on U.S. yields and U.S. corporate credit spreads,” they said.