Editor Pick: Risk Premia to Stay Higher
Deutsche Bank views the current selloff as a temporary correction like May 2006 rather than a meltdown like September 1998. Like May 2006, the current selloff was triggered by risk repricing. Unlike May 2006, carry trade positioning was more extreme while positioning in commodities was less so. 1998 is an even farther cousin than May 2006 in magnitude.
In the near-term, weak buying activity is likely to increase volatility in equities, leading to more frequent market overshoots. Increased volatility is also likely to increase risk premia in fixed income, withdrawing support for the long end of U.S. Treasuries and resulting in steeper yield curves. In the longer term, risk premia will be supported by tightening credit conditions in the U.S. and uncertainty over ECB monetary policy.
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