Just 12% of European credit investors think the US Federal Reserve’s eventual tapering of its bond-buying programme will lead to slower global growth, according to Fitch Ratings’ latest quarterly investor survey. However, over 40% expect tapering to cause significant market volatility.
The credit ratings agency (CRA) reports that, overall, just over 60% think tapering will have a limited impact on the real economy. The response is in line with the view identified in Fitch’s previous survey in July, when nearly three-quarters of investors thought central banks would reduce stimulus in a timely and smooth manner, following the initial shock to financial markets caused by Fed chairman Ben Bernanke’s comments on the Fed’s exit strategy in late May. However, 12% of respondents in the latest survey thought that the Fed would stick with quantitative easing (QE) for too long, leading to inflation and asset bubbles.
Investors remain conscious of the risks associated with US stimulus withdrawal, reports Fitch. Those who thought Fed tapering would slow growth also thought it would expose weaker emerging markets (Ems) to financing problems. Fitch says that in its view EM countries with current account deficits, large external financing needs and foreign currency liabilities that have experienced strong recent credit growth are most vulnerable to changes in investor sentiment from Fed tapering and eventual monetary tightening.
The CRA does not anticipate widespread EM credit distress, owing to secular improvement in credit fundamentals, reducing risks from tighter global liquidity, higher interest rates and foreign exchange (FX) risk. But the potential for the Fed move to increase volatility adds to worries about slowing EM growth. Credible, coherent economic policy management is likely to remain the most effective shield for sovereign credit profiles, adds Fitch
The wide range of survey responses shows the high degree of uncertainty regarding the eventual impact of Fed tapering. More broadly, the unprecedented nature of QE undertaken by the large central banks in the major advanced economies (MAEs) makes judging the impact of an exit on rates, risk premiums, financial markets and the global economy highly uncertain.
Fitch suggests that the Fed will attempt to unwind stimulus gradually, with timing dependent on economic data. This may trigger bouts of market volatility. A further spike in long-term yields and subsequent market turbulence are a key downside risk.
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