Brace yourself!

The recent volatility in both the bond and equity markets can be mainly attributed to the words rather than the deeds of central banks. Whilst the recent rise in US interest rates came as a surprise to some participants (ourselves included) for the market overall the decision was pretty much built in. What was not expected was the rather hawkish tone of the Federal Reserve who maintained that the undershoot of their inflation target was in their opinion transitory and they were willing to look through it and continue with their path of increasing interest rates and reducing their balance sheet (QE). As if this was not enough recent comments by the ECB regarding the robustness of European growth caused investors to contemplate the reduction of ECB balance sheet and believe that rates were also likely to rise. The icing on the cake was the announcement by the Bank of England (after much flip flopping) that rates could rise as a result of their overshooting their inflation target.
These recent central bank communications could be viewed as financial terrorism by some.

This is complete and utter nonsense in our view –  there is no suicide pact amongst Central banks (for this is pretty much what it would amount to). Rather investors should view the recent commentary as a Christmas wish list. Anyone with children knows that as their age progresses so does the length of the wish list to Santa Claus; however, it is rare for all the presents on the wish list to be delivered at Christmas and there will be some disappointment.