The result of the US election will have knock-on effects for the US dollar which could, in turn, lead the Federal Reserve to act in a way the market does not expect, Doug Peebles has warned.
Peebles, who is chief investment officer for fixed income at US group AllianceBernstein (AB), made the comments in a videoed discussion with co-manager Paul DeNoon.
The pair, who co-run several funds including the $18.9 billion AB FCP I-Global High Yield Portfolio, said investors are perhaps too focused on the election and have overlooked the Federal Reserve.
DeNoon said the potential for a December rate rise is high, particularly given inactivity at the FOMC’s November meeting, but he expects, in general, a slow and moderate pace. However, Peebles believes there could be an unseen outcome.
‘The other factor that is involved in the Fed tightening policy is how the dollar reacts. And so, the notion of, if we get a Trump victory, the dollar sells off,’ he said.
‘I think it’s going to be more likely that the Fed moves towards raising interest rates and that could be the situation where they actually raise it a little bit faster than the market believes. But again, this trade off of Fed policy in terms of [its] interest rates and the currencies is going to be something that’s very important for all of us to watch.’
Peebles said although there was little precedent for the current scenario, the status of the UK market in correlation to its central bank could be focused upon.
‘When we look back at the UK, UK runs about a 5% of GDP current account deficit. Which really gave no immediate floor to the British pound,’ Peebles said.
‘US runs also a large trade deficit, not to that same extent as a percentage of GDP, but it does leave the dollar vulnerable to that quick reaction of the markets when they don’t like what’s going on; and if the US runs a big trade deficit, then the natural movement for the dollar would be to weaken in a period of uncertainty, particularly surrounding the US election.’
Peebles co-manager Gershon Distenfeld was previously critical of the rate of US Federal Reserve rate hikes. Speaking to Citywire Selector in May of last year, the high yield bond specialist said Janet Yellen had failed to capitalise on the strength of the US economy.
The AB FCP-I Global High Yield Portfolio returned 9.1% in US dollar terms against a 10.5% rise by its Citywire-assigned benchmark, the BofA Merrill Lynch Global High Yield TR, over the same three-year period to the end of October 2016.