HSBC - "In the context of the financial market history of recent years, we are now facing an unusual situation. We are no longer in the midst of a crisis that is dominating market attention. Instead, we are currently facing relatively ‘normal’ quiet summer markets and the prospect of modest economic improvements in western industrial economies that may ultimately lead to a ‘normalisation’ of monetary policies after years of unprecedented monetary accommodation.
The absence of crisis has meant that ‘risk-on/risk-off’, the dominant market paradigm of recent years now has a much reduced role, and the markets are searching for a paradigm to replace it. It is clear that ‘carry’ which was probably the dominant theme in the pre- crisis years between 2004 and 2007 is not yet set to make a comeback.
Instead the markets are perhaps looking to ‘trade the cycle’. Here the markets try to anticipate relative economic recovery prospects and their implications for yields and policy. This implies a focus on the incoming economic data, so surprise indices are likely to be important. However, despite the market’s recent focus on the prospects for Fed tapering, there is not yet strong evidence that this theme has started to dominate. This may change once market activity picks up again in September, but for now local news may be more important than global developments in driving FX rates.