Where do we stand with the expected great rotation from bonds to equities?
The initial leap forward sparked by Fed chairman Ben Bernanke has stalled after further clarifying comments, but a general shift towards equities from fixed income will not relent. Some of the fervour around Bernanke's comments was evident in the fluctuating market movements seen in July, but the shift from bonds may be slower than expected.
Bonds are finally being coaxed out of a long-running bull market, and a lot of the money that poured into fixed income from equities as the 2008 financial crisis took hold will filter back into equities, where higher returns are due.
Other macro trends affecting equities markets will also play a major role in this shift. Although Europe's recession appears to be worsening, its equity market has emerged somewhat resilient, reinforced by comments from European Central Bank president Mario Draghi last year.
Similarly, US markets are poised to continue their mild rebound from prolonged lower volumes and will attract greater investment as this process continues. A comparison of the Dow Jones Industrial Average figures shows it's current boom - hitting 15542.24 points on 24 July - indicates a massive change in sentiment and investor behaviour from a year prior. For 24 July 2012, the DJIA hit 12617.32, marking a rise of 23%.
If the Fed's QE programme continues, will the great rotation cease to occur?
Bernanke has continually stated the US$85 billion monthly bond buying programme will be tapered off in line with the health of the US economy. Below this logical claim, however, lies the fact the Fed will monitor the performance of markets and the wider economy, and step in if volatility is seen as too high.
Experts have pegged the move back into equities as a macro trend relating largely to the post-crisis recovery, as stocks offer greater returns than low-yielding fixed income products, as opposed to those directly linked to the US QE programme.
What instruments are most affected?
Asides from the obvious effects for bonds and equities, an unprecedented level of redemptions for exchange-traded funds (ETFs) focused on emerging markets occurred in the wake of Bernanke's initial comments about tapering. These instruments will likely continue to feel the effects of both slightly volatile markets and an expected rise in established markets of the US and Europe.
The US$6.6 billion pulled from these instruments in June, however, tells a skewed story. Emerging market ETFs will likely continue to grow, but at a lower and more sustainable rate than they have experienced in recent years, which was driven in part by established markets begin less attractive.