A remarkable amount of comfort was drawn from a simple and far from explicit comment by the Governor of the Federal Reserve Bank, Alan Greenspan. He indicated that interest rates may not have to go up. His aim was to reassure markets at a time when it was feared that Asian contagion would unseat the Goldilocks scenario.
Markets, not unnaturally, interpreted this to mean interest rates were about to come down. Popular wisdom has it that America will not allow a world recession to develop, so, as soon as any signs of consumer retrenchment develop, down will come the cost of money.
In the US, such a move has a very immediate effect. You can readjust the cost of your borrowing over the Internet if needs be, so a cut in interest rates can immediately translate into less cost for your mortgage and more spending money in your pocket. However, there is no sign as yet that the consumer is battening down the hatches. Indeed, the problem there is far more likely to be rampant buying of cheap imported goods. Far Eastern exports to the US have risen massively over the past six months, admittedly from a low base. No reason to cut interest rates yet, I feel.
The argument was different in the UK. Such has been the loss of confidence by manufacturing industry that even sterling has started to anticipate a reversal of the stance of the Monetary Policy Committee. This has yet to happen, but already money markets are discounting a quarter-point cut and you will be hard pushed to find a City pundit not willing to assure you that interest rates will be lowered by the year-end, as he or she tucks into a late gin and tonic after the rigours of volatile trading.
Last week, I closed with the assertion that fixed income markets looked a safe haven. Even though interest rates have yet to come down, this still looks a good bet. Yields are high at the short end at present, with the long end telling us that inflation is yesterday's story. Even so, we yield more than the US or Europe, for no better reason than some risk premium seems appropriate, given our poor record in managing inflation. But will inflation rise if depressed conditions in the emerging world keep the prices of manufactured goods down?
In the US, government long bonds yield around 5.3 per cent. If you believe the mighty dollar should be the benchmark for all government paper, then the real return over inflation is more than 3.5 per cent. Contrast that with the UK, where long gilts yield around 5.8 per cent, and you find a real return of probably no more than 2.5 per cent, assuming a risk premium of half a per cent or so. As it happens, gilts do not look expensive in anything other than an historic perspective, but US bonds do seem to have the edge in terms of attraction. Add to that the fact that a budgetary surplus may emerge in America before too long, then you have all the agreements for a continued full market. That cannot be too bad for equities either, even if it gives little comfort to investors in emerging markets.
American bonds will, of course, dance to the tune of the Governor of the Fed. It is worth remembering that, when he took office in 1987, he said: "I am always fearful of markets and very respectful of them, and intend to watch them closely." It seems the boot is very much on the other foot now.
Brian Tora is chairman of the Greig Middleton investment strategy committee