Month: April 2015

Put not your trust in princes or central bankers (Psalm 146)

This may not be an exact quote from the King James Bible but it could well become increasingly appropriate advice for those investors who have come to believe, whether out of cynicism or naivety, that the various central banks both can and will ‘see them right’.  The People’s Bank of China still appears the most obliging as it is under political orders to ease monetary policy and provide bail-outs wherever needed. In the US,  while the FOMC does seem to have abandoned altogether renewing the notorious Greenspan and Bernanke ‘puts’ for investors it remains collectively ambiguous as to when the first interest rate hikes will start. The Bank of England has been much more restrained in deed but in word has indulged in occasional kite-flying about raising Base Rates and, most recently, in cutting them. In contrast, the ECB and Bank of Japan are still ‘gung ho’ on QE, ZIRP/NIRP and competitive currency devaluation.

Last week collywobbles in most equity markets further confirmed that some investors are losing confidence both in the global economy and the ability of central banks to do much about it. In fact, US markets have been flashing hot and cold for much of the last six months in response to FOMC ambiguity while those in Europe and Japan have been either awaiting or responding to ECB and BoJ QE programmes. Since Mr Draghi fired his starting gun investment flows have been complex with some US investors eager to exploit ECB as well as BoJ largesse while some European and Japanese investors have taken the opportunity to pile into the US. Mr Draghi, presumably deliberately, has set off a feeding frenzy for European sovereign bonds and shorting the euro in favour of the dollar.

Around the world, commentators with varying degrees of shrillness are ramping up talk of asset prices bubbles and surely there will soon be more frequent alarms over Ponzi schemes and Minsky moments. Market movements and economic fundamentals rarely coincide but it is worth saying that the latter are definitely not encouraging. Whatever monetary policy has been credited with in the past it appears now not to be doing much for global demand. Accordingly, putting trust in central banks is asking too much of them. Moreover, at the risk of ending with a banality, it should be noted that the ‘sell in May’ season is already upon us.


There are two contenders for Weekly Irrational Movements in Prices

Thirty-year German bund yields: 0.48%, down 17 pips on week and 90 pips in 2015 so far. OK, so you might end up being repaid in DMarks but less than half a per cent return for 30 years?

Shanghai Composite: up 6.7% last week, 32.5% in 2015 and 111% in 12 months. Even the Chinese authorities are rattled!

Punch bowl maintained

The main story continues to be what central bankers are saying and whether investors believe them. It is evolving all the time and the more complicated it gets, the scarier it becomes. The FOMC is still the biggest actor and the minutes of its March meeting managed to sound dovish while leaving the door open to a rate hike as soon as June.  This, coupled with a string of mixed to soft economic data, has made some  US investors turn on its head the bon mot ‘good news from the economy is good and bad news even better as the FOMC will step in’.  Now, it may be that ‘good news’ from the FOMC means the economy is going bad! The minutes suggest that four or five ‘participants’ still favour a rate hike in June while ‘a couple’ want to delay until 2016. That leaves a solid block of ten or eleven, including Chair Yellen and her four fellow governors, looking at September at the earliest.

Meanwhile in Japan, the dissident Takahide Kiuchi’s modest ‘normalising’ proposals were buried by his eight colleagues at the BoJ. We shall have to wait to see if the Bank of England’s MPC are still unanimous or if Andy Haldane’s kite-flying on lowering Base Rate has won any support.

Weekly Irrational Movements in Prices (WIMPS)

Whatever investors think the central bankers will do next, many are clearly struggling with the increasing disconnect between price movements and fundamental macroeconomics and politics or even specific corporate earnings. So, rather than highlight the biggest movers why not the daftest? This could become a regular feature in Economic Insights but I am not yet sure I can aware prizes every week. There was certainly very stiff competition last week.

Ten year German bond yields: 0.16%, down 3 pips on week and 38 pips in 2015. Catch them before they go negative?

Ten-year Portuguese government bond yields: 1.64%, down 6 pips on week and 105 pips in 2015. Of course, that nice Mr Draghi will guarantee repayment in full?

Brent Crude: up 5.$% on week but only 1% in 2015. Will the Iran nukes deal affect oil supple? Or not? Who cares?

USD/RUB: down 6% on week and 12% in 2015. Hurry, hurry before all those bargains in Russia are snapped up?

Hang Seng: up 7.;9% on week, but ‘only’ 15.5% in 2015. What could go wrong trying to catch up with Shanghai? This week’s winner.

Quarter 1 into Quarter 2: Waiting for ‘Yellot’ and the waning of monetary policy

The refrain that central banks are the driving force in markets is certainly not new but it has become ever shriller over the last three months. The pre-eminence of the Fed (FOMC) has also been reasserted despite Mario Draghi’s barnstorming. Until now most investors have done very nicely out of it, especially those who exploited, out of either cynicism or naivety, faith in the ‘Bernanke put’ (the successor to the saving grace of the ‘Greenspan put’). This klondyke has not met with universal approbation, most recently even from some of the big winners, as asset prices have become ever more detached from corporate fundamentals as well as political and macroeconomic developments.

Chart 1. US Dollar Trade-weighted:  peaking or just pausing?  

US Dollar

Source: Bloomberg

Chart 2. S & P 500: spooked by the Fed


Source: Bloomberg

Over last few weeks, sensing a major change in market mood, I have tried to analyse different mind-sets amongst both central bankers and investors. A striking feature of the FOMC in 2015 is that, despite the retirement of the two most vocal hawks, the balance has swung from delusion on the efficacy of QE and ZIRP (Zero Interest Rate Policy) through bafflement as to why they are not working to realism that they might eventually do harm. This progression was highlighted last week by speeches on monetary policy from both the Chair Janet Yellen and the increasingly influential Vice Chairman Stanley Fischer. ‘Normalisation’ loomed large in both speeches and it is clear that there is no ‘Yellen put’ to save investors from themselves. However, there was also perhaps too much self-justification over prolonging QE & ZIRP and not enough fretting over debt levels and asset price bubbles. If even a realistic FOMC is still determined to keep the faith on the efficacy QE and ZIRP then it makes it more difficult for the Bank of England’s MPC to move on. Chief Economist Andy Haldane’s scholarly kite-flying on lowering Base Rates has fortunately been countered by some realism from Deputy Governor Ben Broadbent. Elsewhere the majority of the ECB Governing Council and the Bank of Japan’s MPC remain in the deluded camp with a new lever to pull in depreciating their currencies, while in China it seems to be the paranoid Government pushing a reluctant PBoC towards ZIRP and unlimited credit.

Chart 3. Euro trade-weighted: a ‘good’ quarter


Source: Bloomberg

Chart 4. DAX: Vielen dank, Herr Doktor President Draghi


Source: Bloomberg

The supreme irony of all the delusion, bafflement, cynicism and naivety is that monetary policy globally has reached its limits and will need to be ‘normalised’ before it does much more harm. It does not matter whether the FOMC hike rates in June or September but hikes it surely will and their counterparts elsewhere will have to follow.  Whether or not central bankers are willing to admit it, the reality is that QE and ZIRP (NIRP even less) cannot on their own re-stimulate global demand. In the coming months, therefore, attention will switch back to fiscal policy but in this too most governments seem unable, if also unwilling, to achieve much.