Inflation dominates financial stability risks for central banks
Despite the banking industry turmoil, central banks continued to raise rates last week. This marked moves from the European Central Bank (ECB) by 50Bps, Federal Reserve (Fed) by 25Bps, Bank of England by 25Bps, Swiss National Bank by 50Bps, Norway by 25Bps, the Philippines by 25Bps, and Taiwan by 12.5Bps. Central banks appear determined to show they have the tools in place to nip financial stability issues in the bud and so monetary policy is free to deal with inflation.
The Fed is likely nearly done
The March Federal Open Market Committee (FOMC) turned out to be on the dovish side. This was evident in the written statement in which the FOMC anticipates – “some additional policy firming may be appropriate” from “ongoing increases in the target range will be appropriate”. There was a risk that if the Fed chose not to hike rates, it would raise concerns about further financial system weakness. The reason given was that financial instability was "likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation”.
The Fed has clearly signalled to the markets that it can control financial contagion from spreading by providing large amounts of liquidity. Over the past weeks we have seen a combination of measures to stabilise the market turmoil, including 1) The Fed’s proposal to provide immediate deposit protection and emergency lending 2) the intervention by Swiss Authorities to merge Switzerland’s two biggest banks and 3) the resumption of a dollar swap facility among central banks.
If the banking crisis calms down and the economic data looks anything similar to the January/February reports, another rate hike at the May FOMC meeting should not be ruled out. Conversely, ongoing market dislocations could outweigh the data and push the Fed into pause mode. Currently the implied probability for Fed Funds Futures looks for a rate cut during the summer. That scenario can only materialise if the risks emanating from the banking system continue to deteriorate from a market and/or economic perspective.
Gold offers a potential investment solution
There is no doubt that the investment landscape is fraught with elevated uncertainty and, of course, the volatility that comes with it. Gold is benefitting twofold from its safe haven status alongside the earlier than expected pivot in monetary policy by the Fed. While the Fed does not currently see rate cuts this year, in contrast to market expectations, its projections raise the prospect of rate cuts for 2024 which remains price supportive for gold.
The Commodity Futures Trading Commission (CFTC) has now largely caught up with publishing futures positioning data for gold following the disruption in February due to a ransomware attack on ION Trading. We now know there was a slump in positioning during February, but net longs in gold futures rose back above 154k contracts on 14 March 2023 as the banking crisis was unfolding.
Laying an emphasis on quality stocks
Rising concerns about financial stability tends to cause negative feedback on the real economy. Quality has stood the test of time, displaying the steadiest outperformance over 10-year periods. Dating back to the 1970s, quality has displayed the highest percentage 89% of outperforming periods in comparison to other well-known factors.
The WisdomTree Global Developed Quality Dividend Index (Ticker: WTDDGTR Index) offers investors an exposure to dividend paying stocks in developed markets with a quality tilt. The WisdomTree Global Developed Quality Dividend Index has outperformed the MSCI World Index (Ticker: MXWO Index) by 1.54% over the past five years. The emphasis on quality, by tilting the portfolio exposure to stocks with a high return on equity has played an important role in its outperformance versus the benchmark.
Over the past five years, we also observed the allocation and selection of stocks within the information technology, financial and healthcare sectors contributed meaningfully to the 1.54% outperformance versus the MSCI World Index as highlighted below.
The Fed is likely nearly done
The March Federal Open Market Committee (FOMC) turned out to be on the dovish side. This was evident in the written statement in which the FOMC anticipates – “some additional policy firming may be appropriate” from “ongoing increases in the target range will be appropriate”. There was a risk that if the Fed chose not to hike rates, it would raise concerns about further financial system weakness. The reason given was that financial instability was "likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation”.
The Fed has clearly signalled to the markets that it can control financial contagion from spreading by providing large amounts of liquidity. Over the past weeks we have seen a combination of measures to stabilise the market turmoil, including 1) The Fed’s proposal to provide immediate deposit protection and emergency lending 2) the intervention by Swiss Authorities to merge Switzerland’s two biggest banks and 3) the resumption of a dollar swap facility among central banks.
If the banking crisis calms down and the economic data looks anything similar to the January/February reports, another rate hike at the May FOMC meeting should not be ruled out. Conversely, ongoing market dislocations could outweigh the data and push the Fed into pause mode. Currently the implied probability for Fed Funds Futures looks for a rate cut during the summer. That scenario can only materialise if the risks emanating from the banking system continue to deteriorate from a market and/or economic perspective.
Gold offers a potential investment solution
There is no doubt that the investment landscape is fraught with elevated uncertainty and, of course, the volatility that comes with it. Gold is benefitting twofold from its safe haven status alongside the earlier than expected pivot in monetary policy by the Fed. While the Fed does not currently see rate cuts this year, in contrast to market expectations, its projections raise the prospect of rate cuts for 2024 which remains price supportive for gold.
The Commodity Futures Trading Commission (CFTC) has now largely caught up with publishing futures positioning data for gold following the disruption in February due to a ransomware attack on ION Trading. We now know there was a slump in positioning during February, but net longs in gold futures rose back above 154k contracts on 14 March 2023 as the banking crisis was unfolding.
Laying an emphasis on quality stocks
Rising concerns about financial stability tends to cause negative feedback on the real economy. Quality has stood the test of time, displaying the steadiest outperformance over 10-year periods. Dating back to the 1970s, quality has displayed the highest percentage 89% of outperforming periods in comparison to other well-known factors.
The WisdomTree Global Developed Quality Dividend Index (Ticker: WTDDGTR Index) offers investors an exposure to dividend paying stocks in developed markets with a quality tilt. The WisdomTree Global Developed Quality Dividend Index has outperformed the MSCI World Index (Ticker: MXWO Index) by 1.54% over the past five years. The emphasis on quality, by tilting the portfolio exposure to stocks with a high return on equity has played an important role in its outperformance versus the benchmark.
Over the past five years, we also observed the allocation and selection of stocks within the information technology, financial and healthcare sectors contributed meaningfully to the 1.54% outperformance versus the MSCI World Index as highlighted below.