January was an extraordinarily positive month in the markets for virtually all assets, after a horrible 2018 — and it’s all due to the Fed. The US central bank executed a massive U-turn in its monetary policy and, while many observers like to point to low inflation as the reason for the Fed’s aborted effort to normalise monetary policy, something more sinister is behind it.
We live in such strange times that most people don’t even notice how quickly certain principles that until not long ago appeared fundamental for Western societies are being eroded.
For those who are afraid of zombies, the Bank for International Settlements (BIS) has some bad news: they’re on the rise. What’s more, many people may be working for zombies.
But on the flip side, zombies may spook central banks enough that they don’t raise interest rates too high.
How afraid should investors be of the end of quantitative easing? Judging by recent comments, but also by the markets’ reaction until now, not too afraid.
As the US stocks bull market is now officially the longest after World War II, fears are increasing that the end is nigh for the bulls. However, the approach of the US mid-term elections in November might mean not just that the bull market could continue, but also the end of the emerging markets rout.
While all eyes are still on Turkey, another emerging market is about to show the ugly side of quantitative tightening, and this time things could get really serious.
The world’s second largest economy has been a “success story” for so long that people have forgotten about China’s many vulnerabilities. Or rather, the Chinese communist party has been so good at keeping things under wraps, that few of the country’s weaknesses are known to the outside world.
This past week, there has been a frenzy of selling of emerging markets assets. The outflows from both stocks and debt in emerging markets reached their highest level since December 2016.
This amounted to $3.7 billion withdrawn from emerging market equities and bonds, according to data analysed by Bank of America Merrill Lynch. These outflows have helped push our old friend, the Bull/Bear indicator developed by BofA Merrill Lynch, to 4.8 — its lowest level since January 2017.
The year-to-date capital flows seem to show a dramatic change in the way investors perceive risk in the stock markets. Emerging market equities, Japan and the financial sector seem to have turned from risky assets into “safe havens”.
Everybody is waiting for Jay Powell, the new Fed Chair, to set out his vision this week. The main question is: will there be a “Powell Put” just as there has been a Greenspan put, a Bernanke put and a Yellen put?
A recent working paper published by the International Monetary Fund looks at the impact of unconventional monetary policy on an open economy, taking Canada’s case as an example.
The paper’s main finding is that unconventional monetary policy by the Canadian central bank has had expansionary effects on the Canadian economy. Continue reading