25th May 2016
For those who saw, last month I questioned the decision making capabilities of global central banks. In fact I even went so far as to say they had lost the plot! Essentially this was in response to Janet Yellen’s complete volte-face on the issue of US rate hikes. Where as recently as December 15th the Fed were indicating four rate hikes in 2016, just three months later the Fed’s language completely changed to suggest hesitancy and “caution in adjusting policy”. All this whilst the economy continued to chug along with another strong payrolls number, an ever improving quits rate and even an uptick in the participation rate for good measure. Why turn dovish in this environment? Surely something else was going on…
The answer of course was China. The G20 meeting in Shanghai seems to have been the catalyst for some kind of policy coordination. The immediate threat of a disorderly devaluation like that of August 2015 looks to have been too much to take for the global central banks and certainly not a good look for the US in an election year. However that was only half of the story. After all, what use is a dovish Fed if the ECB and BoJ are just going to turn around and look to de-value in repost? Sure enough we had the change to ECB monetary policy. Having pushed the deposit rate into negative territory on December 3rd, April saw an announcement of corporate bond purchases but no further movement on rates. A credit ease without a monetary ease. Japan followed suit by sitting on their hands at the last BoJ meeting on the 28th of April despite very poor CPI and GDP numbers. So what has all of this meant for the financial markets? Well the turnaround has been extraordinary, with risk assets shrugging off their early year woes to rally hard and test new highs – in equities at least – whilst volatility, as measured by the VIX, has collapsed once more. Interestingly, the Chinese Yuan, having weakened some 2.5% against the US Dollar over that period in August 2015, has, since the February G20 meeting, weakened a further 3%. However the market reaction to the latter couldn’t have been more benign with the recent policy coordination completely dampening volatility
By Steven O’Hanlon
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