Analysts and markets alike are already discounting a 25 basis points rise in the Fed’s core rates this week. So investors’ reaction will depend largely on Janet Yellen’s message regarding future rate hikes. A vague gradualism no longer matches the kind of unequivocal commitment the markets are waiting for. Anything short of this could fuel general volatility and unrest.
Most investors had priced in a bold increase in monthly purchases by the ECB under its QE programme. No wonder they showed utter dismay when confronted with a mere extension of the scheme until March 2017 plus pledges to buy sound local authorities’ issues. The slight reduction in the current negative rate imposed on overnight money placed by credit institutions in the central bank did little to raise market sentiment.
Banks have made a massive effort to increase their solvency by sharply reducing risk exposure and boosting their own resources. They face rough times ahead as plummeting interest rates and profits leave them little room for comfort. Some big players, such as Deutsche Bank, have suffered huge losses while others struggle to keep pace faced with an adverse outlook.
Last night, the leaders of the Ciudadanos and Podemos emerging parties joined forces to deliver a scathing bashing to the Socialist candidate during the debate held as a foretaste of the Spanish General Elections on December 20th. Spanish Prime Minister Rajoy judiciously declined the invitation to assist at the expected slaughtering.
The main global central bankers have conveyed reassuring market-friendly messages following their last meetings. The Fed pictured a rosy outlook of home growth and employment paving the way for a moderate rate rise in December. The ECB on its side signalled its firm commitment to conduct a more flexible and accommodative policy by strengthening its QE stance. Yet good news is failing to stiffen market sentiment.
Better placed observers, such as the Financial Times, bet this week’s FOMC meeting should serve as a test of its members’ mood regarding the planned increase in US rates. Janet Yellen lacks the authority her predecessors commanded and wants to make sure this critical decision garners full support.
Indeed, the ECB can go further. Draghi broke the discipline again by skilfully taking advantage of a dull reference in the communiqué to the ECB’s intention to study all potential possibilities should the need arise.
Polls predict no party will command a comfortable majority in Spain after the generel elections in December. It is the first time this has happened in the new era of democracy. No one knows for sure what the plausible consequences might be, but you can bet they will cause undue damage to the economy.
On face value, the ruthless tools used by central bankers to inject piles of money into the economy point to a brand new way of conducting monetary policy. Never before, except for in wartime, did they dare to trigger such massive asset-buying programmes. And never before did they so blatantly disregard the future risks a huge liquidity glut might fuel.
Marco Bellochio was probably unaware of how close China could become when he directed his famous movie portraying a rotten Western society besieged by Mao’s revolutionary thrust. History eventually proved that the Little Red Book had less enduring success than the Holy Bible…