Interesting comment from Jim Reid from Deutsche Bank this morning… Obvisouly markets need to go to rehab but they are fighting for another fix.
« So what have we learnt from a pretty fascinating and testing week for markets. Above all else we’ve been given a pretty big clue that global markets still need stimulus to maintain positive momentum. The mere suggestion by Bullard (a non-voter) on Thursday that instead of his previous preference for a Q1 hike, he might actually support an extension of QE, sent markets spiking higher in the last trading session and a half of the week. The S&P 500 and Stoxx 600 ended the week +3.6% and +5.4% above their Thursday intra-day lows with both indices ending the week just -1% lower.
The Fed was not the only central bank making dovish noises as the market was falling last week. In the UK, on Friday the BoE’s chief economist said on Friday that economic data since June had left him “gloomier” about the economy to the extent that he now thought that, “interest rates could remain lower for longer, certainly than I had expected three months ago.” The ECB’s Coeure said on Friday that the ECB Governing Council is, « ready to take additional non-conventional measures, if needed, » whilst also commenting that the ECB, “will start within the next days to purchase the assets that are foreseen under our new purchase programmes, with the objective to steer the balance sheet of the ECB to a higher level.” Easing noises were also coming out of China later in the week as Bloomberg News reported that the PBOC is set to inject around 200bn Yuan into some national and regional lenders to help them prepare for year-end liquidity needs according to, “a government official familiar with the matter.”
So with all this attention on central banks, as this week progresses markets will likely start focusing on the 2-day FOMC next Tuesday/Wednesday. Although there’s no planned press conference the statement will be heavily anticipated as will whether they decide to keep the last legs of QE going. I’d imagine most would think it unlikely that they will but much might depend on what transpires this week. If Bullard’s turnaround continues to reassure the market then maybe there is less need to heed his advice.
Wrapping up the market moves on Friday, credit markets reflected the positive sentiment as Main and Xover closed 5bps and 30bps tighter respectively in Europe whilst US credit indices saw similar moves. Bond markets in the European periphery recovered some of the widening earlier in the week, led by 10 year yields in Greece which rallied 84bps to close below 8%. Treasuries and Bunds were weaker both closing 4bps wider whilst the VIX also fell sharply, ending Friday down almost 10points at 22 from its Wednesday high.
Asian markets are following the stronger US tone from Friday. Bourses in Hong Kong, Sydney, Shanghai and Seoul are up +0.3%, +1%, +0.3% and +1.5% respectively. Whilst in Japan, equities have received a boost with the Topix rallying 3.7% following a report in the Japanese press over the weekend that the $1.2tn Government Pension Investment Fund plans to raise its allocation target for domestic shares to 25% from 12%.
Looking ahead, in lieu of the FOMC meeting next week, one of the biggest data points of the week is US CPI on Wednesday. As Joe Lavorgna pointed out to us, since late June the 5-year breakeven inflation rate has declined roughly 60 bps to 1.5% and now stands at the lowest level since September 2011 (1.4%). So the inflation number over the next few months could have a large impact on the Fed’s ability to raise rates over the next 12-18 months. We still think they’ll struggle to raise rates much before the next recession when they’ll be forced into QE again. »