Legal & General Investment Management’s head of Credit Strategy Ben Bennett (pictured) has expressed concern over the Federal Reserve and Bank of Japan’s meetings occurring on 21 September 2016.
Bennett said it is unlikely the Fed will hike rates this week. He assessed that the institution will do so in December but he pointed out a “significant risk” may make them unable to increase interest rates.
“Although Q3 GDP appears to be fine, the job market remains robust, and US core inflation is close to target, other foreign central banks may announce very dovish policy in the meantime, which would put upward pressure on the US dollar.
“There are also many other potential risks – including the Italian referendum, China’s FX policy, and the US presidential election – which could destabilise markets, increase downside global growth, and delay the Fed’s decision to raise rates,” Bennett listed.
Regarding the BoJ, Bennett said he worries about the market reaction following the meeting as the Japanese central bank’s credibility has been undermined.
He believes the possibility is strong that the yen strengthens in the aftermath of an eventual policy change and that it would undermine the BoJ’s ability to boost inflation.
“Government yield curves have started to steepen in recent days, and a continuation of this could undermine the Goldilocks environment. Furthermore, corporate bond supply has picked up in September and could lead to temporary indigestion unless inflows remain strong.
“Overall, in the absence of downside events, markets may be able to cope with a Fed rate hike in December, but US dollar strength and any adverse reaction following the BoJ meeting will create vulnerabilities,” Bennett explained.
He added that its team remained “cautiously positioned” in LGIM’s global credit portfolios.