Goldman Sachs says that the trend of rising rates in the US is 'boiling the frog' on risk appetite
You may know the old chestnut that if you put a frog in a pot of cold water and then apply heat to the water the frog will not jump and will get boiled.
Its actually b/s. I don't encourage you to experiment but those who have find that the frog does indeed, jump out. Frogs are not as stupid as say, oh, i dunno, voters? Financial markets?
Anyway, back to GS, this in summary:
- As the rate of return on safe assets rises, the appeal of risky assets falls
- we increasingly worry that rising trend in US real rates vs global rates is "boiling the frog" on risk appetite
- An increase in the fragility of risk appetite is already visible in EM, we would argue, but it logically extends to global risk assets more generally
The risks between now and December
- We see some risk that one of the "usual suspects" will re-emerge - Italian debt, China growth, US trade wars, liquidity events like the VIX spike. But Occam's razor suggests the most likely risk is the thematic risk that is already playing out -rising US real rates on the world's "safe asset" are leaving risky assets more vulnerable to otherwise-manageable imperfections in the risk environment.
- An incremental risk is that Fed communication could turn more hawkish; whereas money markets are currently pricing roughly three more hikes through 2019, our US economics team expects six. The strength of recent US data suggests the near-term risks to US real rates may be higher than markets expect.
Bolding is mine, GS looking for more hikes than is currently priced. If they are right, higher USD, lower AUD (amongst others of course).
As for frogs they are knee deep in it. I'll see myself out.
