The State Street Global Markets analysis of institutional investor confidence has fallen for a second successive month.
If 2004 ended with a bang and the biggest rise in State Street’s investor confidence in 20 months, 2005 has begun more cautiously with two consecutive monthly falls in the index.
Following the modest 0.5-point downward revision to January’s reading and the subsequent 1.8-point fall in February, the index of institutional investor confidence now stands at 88.0, its lowest reading since November and only 3.4 points above its May low.
This caution is not surprising, says State Street. Investors have had plenty reason to reduce their allocations to risky assets thus far in 2005; interest rate expectations are higher, particularly in the US, oil prices even after the recent correction are still up 10% and growth expectations are lower as reflected by the 40bps worth of flattening in the US yield curve year-to-date.
State Street reckons this fragility in aggregate investor confidence, which appears to be particularly centred in the US, will have important implications going forward as to how financial markets will react to the anticipated tighter monetary policy.
Central bankers, Greenspan included, often infer from the low level of credit spreads and dramatic curve flattening that investors are in fact well prepared for tighter policy. Indeed, says State Street, we can expect a repeat of these assertions in this week’s testimonies. However, looking at investors’ portfolios confidence is somewhat more fragile, at least in the US, than implied by these spreads and there is a danger that policy makers will underestimate the knock-on effects of policy on financial markets and risky assets in particular.