Risk appetite dips as investors as Fed normalization is anticipated

Asia Pacific saw the largest decline in market sentiment according to a global State Street poll

Risk appetite dips as investors as Fed normalization is anticipated
Steve Randall

Investor market sentiment was rattled in June amid expectation that the US central bank would begin to ease its supportive polices.

The Global Investor Confidence Index from State Street Global Markets slipped 2.1 points to 96.3 from the previous month with Asia down 9 points (to 91.7), North America down 3.4 (95.3), and Europe down 2 (91).

The index assigns a precise meaning to changes in institutional investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets.

Rajeev Bhargava, head of Investor Behavior Research, State Street Associates, noted that risk appetite was affected by some key concerns.

“The move was partially driven by weaker sentiment from US investors, likely in response to heightened expectations of policy normalization given the Feds update to their dot plot guidance this month,” he said.

Interest rates

The Fed releases the minutes of its most recent meeting this Wednesday (June 7) and follows hints last month that it may begin to hike interest rates in 2023 as inflationary pressures force a shift in policy.

“Legitimate questions about the direction of monetary policy and the Fed’s reaction function are now front and centre in the minds of market participants,” Vishwanath Tirupattur, a strategist at Morgan Stanley told the FT, adding that the Fed’s supportive policies have had a profound effect on the markets during the pandemic.

The Fed is not the only story in town though with the trajectory and impact of the Delta coronavirus variant being closely observed along with tighter financial controls by Chinese authorities.