Markets spotlight: commentary in review

Our round-up of the week’s best markets comment and analysis from the Financial Times looks towards the moment of maximum danger on bond markets, as well as suggesting a radical way of kick-starting growth. It’s taken from our Markets Insight and Smart Money columns, written by our industry contributors and in-house journalists.

With less than a week until Britain’s referendum on its EU membership, FT markets editor Michael Mackenzie suggests investors should watch the pound to US dollar exchange rate because “as the votes are counted next week, FX traders will deliver global markets’ first verdict as the result emerges, with sterling setting the pace”.

In his Long View column, the FT’s John Authers examines the critical juncture that markets have reached. “Any number of normally reliable measures of anxiety and risk-aversion suggest that investors are deeply alarmed at present. They appear to be braced for a crisis.”

Gold — the traditional haven asset is discussed by William Hobbs, strategist at Barclays, who says that the yellow metal should be no more than “low single digits” per cent of portfolios. “For those looking for a port in the storm, cash and short-term bonds remain the best option, nominal values will remain constant even if real values won’t.”

Sovereign bond yields set new record lows this week as central bankers in the US, Japan and England met and each held policy unchanged. Michala Marcussen, economist at Société Générale, discusses how entrenched quantitative easing has made sovereign bond yields an “increasingly imperfect substitute” for the risk-free rate or return.

In analysing the other impacts of extended QE, Ms Marcussen says fiscal policy, structural reform along with easy monetary policies may work “to boost growth to exit from the current configuration.”

“But it would still be a slow process for the risk-free rate to return to its normal signally function. Return free risk seems set to stay and the longer it remains the more risk it is likely to create.”

The FT’s Henny Sender notes a stabilisation in May’s capital outflows from China and the renminbi. She writes: “China is still learning how to integrate its financial markets with those of the rest of the world. There is no consensus on what the appropriate speed is for emerging markets to lift capital controls; both controls and liberalisation involve risks and trade-offs.”

Chinese official intervention in the onshore equity markets last summer is one of the reasons cited for MSCI’s decision to delay the inclusion of Chinese A-shares in its benchmark emerging market index.

John Authers applauds the decision and outlines the changes that are required for inclusion, but notes “it is absurd that so much power has effectively been delegated to a small private organisation.”

“For now, a quoted US indexing company seems to be doing a job that might more naturally belong to multilateral governmental bodies, or regulators. But the fact that its decision matters so much suggests there is something in the way international markets have come to work that has gone badly awry.”