Fed losing marbles, One good month and all is well.
March 08, 2016
Bets are racking up on Thursdays meeting, the euro fell yesterday off the back of an anticipated further stimulus package from the ECB to support the fragile euro zone growth. It has certainly been a long time coming and the last time the market got excited about a stimulus package we were all sorely disappointed with a lot less than expected. Once bitten twice shy, we are sitting firmly on the fence as to what comes out on Thursday however if history is anything to go by it won’t be nearly enough and definitely won’t work. Anticipations are for a further push of interest rates into the negative and some form or adjustment to the 1.1 trillion euro bond purchase.
Although the bets are racking up they are nowhere near what they should be following Decembers disappointment. There’s an old saying in Tennessee, 'Fool me once, shame on … shame on you. Fool me… You can't get fooled again!'” As everyone sizes up what super Mario is going to do, it is clear that it is not a question of if, rather how much and for how long. With the euro zone finally admitting to deflation in February, the pressure has increased significantly.
Greece is heading towards another sticky situation, Euclid Tsakalatos has urged its creditors to return to Athens to finish the job they started. After an initial review by a team from the euro zone and the IMF stalled in February over pension reform. Without any agreement from Greece’s creditors that it has delivered in its pension reforms they will not be eligible to receive the next tranche of loans. If this is not achieved by the 1st of May then the trouble will begin in earnest. Mr Tsakalatos has said that he wants institutions to accept Greece’s position, opening the door for talks on debt relief.
In the UK the BoE are likely to pump cash into markets around the EU referendum period amid fear of a bank run. Regulators were extremely vague about why it wants to reassure markets with this unusual action, but it is thought that it is more of a precautionary measures. An additional three LTRO’s will be able along with the current planned ones. However reports are emerging that UK banks are within a hairs breadth of their capital adequacy targets more worryingly rumours are circulating that another increase in capital requirements is on its way, which as it stands UK banks have no chance of being able to hit.
Moody’s announced that the protracted fall in oil price and China slowdown will mean weaker global growth and not an out and out recession. Moody’s has thus far taken a pretty bearish stance taking negative rating actions for a large number of corporates, banks and sovereigns who are reliant upon tax receipts from oil revenues. With their focus being squarely on those directly exposed to the prices of oil and commodities, it is clear market volatility has spread way beyond the energy and commodity sectors leading to a broad decline in global equity prices and a surge in high yield corporate bond spreads.
The Fed are beginning to draw their battle lines on rate hikes ahead of the March meeting. Whether the Fed are actually going to take further action in March or just whipping up a bit of hysteria is unknown, but the likelihood is almost certainly the latter. With the first stirrings of inflation rising and a rise in the price of oil, many are losing their heads with excitement. However it will take a lot more than skin deep movements to convince the more bearish Fed members. Brainard the leading voice for the Fed to stay cautious in a world where China remains at risk and overall growth is sluggish at best, said one strong month is no reason to rush. And it is definitely up for debate as to whether Feb could be described as anything other than worrying. One data point is just that and does not show a pattern.
As the Fed are getting giddy with excitement, reality is striking in China with export figures slumping. Chinese sticks tumbled with plunging exports signalling a deeper slowdown. Chinese stocks fell for the first time in six days and investors are becoming suspicious that government backed funds are or have been paring support for equities. Which of course they have, welcome to the game and where have you been for the past decade. The Shanghai Comp halted its longest winning streak since October falling 2.5% with financial, industrial and tech firms all taking a hit. The worrying figures are that exports fell 25,4% in February in USD terms from a year earlier with imports declining for 16 straight months.
The issues continue in Japan, where government paper has become worthless or near as damn it. The $5 trillion quandary is causing some serious headaches, as negative yielding Japanese debt doubles, and the amount of Japanese gov bonds in the market offering negative yields has doubled in the past year. After the BoJ’s surprise decision to slash rates further into the negative at the end of Jan, almost three quarters of all JGB’s would offer either no returns or burn a hole in balance sheets. With the government getting paid to borrow 2.2 trillion yen for a decade for the first time ever at an auction last week. Good.
The World Gold Council’s latest report sheds some light on the global situation, with central banks adding 336 tonnes of gold to their reserves in the second half of 2015 up from 225 tonnes in the first half of the year. We are definitely seeing “renewed vigor” in the appetites of central banks globally. 10 countries specifically have been hoarding enormous piles of gold, gold is clearly on fire, entering a bull market last week but investors clearly aren’t the only ones getting in on the action.
Today is a pretty exciting one, with Carney and Cunliffe testifying on Brexit at a parliament committee, followed by Eurozone GDP figures. These two between them should provide enough excitement to keep us busy.
Have a great day.