It is important to maintain some level of calm and a longer-term perspective to differentiate true fundamental signals from financial market noise. That sense of perspective helps us assess the events creating the dislocations and identify possible circuit breakers.
Almost all market participants were shocked by the headline on Monday night that Chinese authorities weakened the reference rate for the yuan by a record 1.9%. Some initially thought it was a mistake. All scrambled to understand the motivations and the implications.
At this point, the evidence is close to overwhelming that the Federal Reserve will embark on a tightening cycle this year.
Financial markets certainly have been volatile in recent weeks, driven largely by a sharp upward move in global bond yields. Investors are left searching for answers for the key drivers of the move in interest rates, as it was largely unanticipated and affected many portfolios.
Two critical factors often overlooked in fundamental reasoning for market prices are valuation and initial conditions. This is where a framework can enable investors to look past the short-term market noise when making investment decisions.
The minutes of the March 17–18 Federal Open Market Committee meeting have an interesting paragraph toward the end that suggests a roadmap for how the FOMC assesses inflation in the context of the appropriate timing to tighten policy
How have global financial markets reacted to the worse-than-expected economic news from the U.S.? The answer is likely different than many would expect.