The policy ‘silver bullet’
As the dust begins to settle around the U.S. election, the markets will keep a close eye on how the returning president and the still-divided Congress will look to tackle the fast-approaching fiscal cliff situation, which threatens to push the country back into recession. But while the U.S. political drama comes one step closer to resolution, political issues still remain in the eurozone with policy-makers still unable, or perhaps reluctant, to make the big decisions on Europe’s future.
The markets seem poised to react to ‘silver bullet’ announcements; just look at the effects that Mario Draghi’s comments or the ECB’s announcements in August and September had on the markets. But is a single ‘policy silver bullet’ what the markets are looking for?
Let’s look back at how the eurozone found itself in this mess. In short, the architecture of how the eurozone fit together as a fiscal and political union was wrong from the outset. Where members focused on the benefits of a single currency, issues relating to governance, sovereignty, competitiveness and others were tolerated and accepted as works in progress. These issues have now come to the fore and as a result, what is needed in the eurozone to deal with the issues is much less of a single policy ‘silver bullet’ and more a series of bullets.
What this means for investors and advisors is that resolution in the eurozone is less likely to come on the back of one grand announcement, but a series of smaller policy resolutions, which will unfortunately draw out the crisis over a longer period of time.
What remains to be seen is a clear long-term vision for the eurozone by European policy makers. Until we see clearer signs of this, on the back of smaller structural resolutions by policy makers, the markets are likely to continue to ‘muddle through’ with the continuation of lower returns potential and higher volatilities.
What also remains to be seen is how U.S. policy makers will handle the upcoming fiscal cliff debate. While it seems inevitable that some resolution will be found, the extent of policy makers’ success, as measured by limiting the contraction of GDP, will be closely watched over the coming months.
As a result, PIMCO-EQT funds remain cautious, focusing on long-term positioning based off fundamentals and remaining nimble to take opportunities as they arise.