The dramatic rebound in stocks around the world since October 15 once again demonstrates the overwhelming influence of the central banks on global equity markets. The Greenspan and Bernanke Puts have morphed into the puts of the major central bankers. As a result, they’ve made shorting stocks a losing proposition. Underweighting stocks simply because they are overvalued based on historical metrics also has been problematic for conservatively inclined institutional investors, who must at least match if not beat their benchmarks. Consider the following recent chronology of central bank interventions that have boosted stock prices:
(1) Bullard bounce. On Thursday, October 15, the dramatic rebound in stock prices from their lows was triggered by a comment by FRB-St. Louis President James Bullard that the Federal Reserve should consider extending its bond-buying program, currently at $15 billion per month, beyond October due to the market selloff--allowing more time to see how the US economic outlook evolves. Yet in his interview with Bloomberg News, Bullard also said he still believes that the FOMC should start raising the federal funds rate in March of next year.
Then after the FOMC meeting in late October, Bullard praised the Fed’s decision to end the bond purchases. He reiterated that he favors starting to raise interest rates next spring, ahead of the mid-year consensus among his FOMC colleagues. In an interview summarized in the 11/20 WSJ:
(1) Bullard bounce. On Thursday, October 15, the dramatic rebound in stock prices from their lows was triggered by a comment by FRB-St. Louis President James Bullard that the Federal Reserve should consider extending its bond-buying program, currently at $15 billion per month, beyond October due to the market selloff--allowing more time to see how the US economic outlook evolves. Yet in his interview with Bloomberg News, Bullard also said he still believes that the FOMC should start raising the federal funds rate in March of next year.
Then after the FOMC meeting in late October, Bullard praised the Fed’s decision to end the bond purchases. He reiterated that he favors starting to raise interest rates next spring, ahead of the mid-year consensus among his FOMC colleagues. In an interview summarized in the 11/20 WSJ:
Bullard attributed some of the confusion to the fact that many market participants didn’t listen closely enough to what he said. He allowed that monetary policy making has become far more complex and thus more challenging to communicate. But he underscored an underlying consistency to his view, noting what he said about the Fed’s bond-buying program hadn’t altered his long-running view that short-term interest rates should be lifted off their current near zero levels next spring.
(2) Kuroda shock. On Friday, October 31, in a surprise move, the Bank of Japan (BOJ) stated that it is upping the ante on the QQE monetary stimulus program that was announced on April 4, 2013. The BOJ’s press release raised JGB purchases to an annual pace of 80 trillion yen from 50 trillion yen. The pace of buying was tripled for both ETFs (3 trillion yen) and J-REITs (90 billion yen). At the current exchange rate, ETF purchases would amount to about $27 billion. That’s not that much given that the market capitalization of the Japan MSCI is $2.7 trillion currently. So what’s all the excitement about?
The latest program is open-ended, according to the latest press release: “The Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” The time horizon for achieving this goal was about two years in the 2013 press release.
On Friday, November 21, Japan’s finance minister told a news conference that the speed of the yen’s recent decline was “too fast.” He added, “There is no doubt about that.” Last Tuesday, November 25, the minutes of the October 31 meeting of the BOJ's governing board showed that the hurdle to further quantitative easing is high. Some board members were concerned that expanding the central bank's quantitative easing could raise the risk that it would be seen as financing the government deficit.
(3) Draghi’s pledge. On 10/11, Bloomberg reported that ECB President Mario Draghi told reporters in Washington that expanding the ECB’s balance sheet is the last monetary tool left to revive inflation, although there is no target for how much it might be increased. He said, “I gave you a kind of ballpark figure, say about the size the balance sheet had at the start of 2012.” That would be a remarkable increase of €1.0 trillion. On 11/21, in a keynote speech in Frankfurt, Draghi said that the ECB will “do what we must to raise inflation and inflation expectations as fast as possible.” In effect, he backed US-style quantitative easing.
Speaking in Finland on 11/27, Draghi said that the Eurozone needs a comprehensive strategy including reforms by governments to get it back on track. His comments and weak CPI data released on Friday lowered the euro to $1.246 and triggered a new set of record-low bond yields for the Eurozone's biggest economies, with France’s 10-year yield dropping below 1% for the first time.
The Eurozone flash CPI estimate rose just 0.3% y/y in November, down from 0.4% in October. Bank loans to nonfinancial corporations fell €132.0 billion (saar) during October, the ninth consecutive monthly decline, and the 26th in 27 months.
(4) Chinese rates. The People's Bank of China cut its benchmark one-year loan interest rate on Friday, November 21, to 5.6% from 6.0% and cut its benchmark one-year deposit rate to 2.75% from 3.00%. The nation's central bank also hiked the upper limit on deposit interest rates to 1.2 times the benchmark rate from 1.1 times the benchmark rate. The bank said that it took the actions, which were largely unexpected and are the first such changes since July 2012, in response to expensive borrowing costs rather than any direct worries about the economy's slowdown. Chinese bank loans rose 13.2% y/y during October, the weakest growth since November 2008.
The latest program is open-ended, according to the latest press release: “The Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” The time horizon for achieving this goal was about two years in the 2013 press release.
On Friday, November 21, Japan’s finance minister told a news conference that the speed of the yen’s recent decline was “too fast.” He added, “There is no doubt about that.” Last Tuesday, November 25, the minutes of the October 31 meeting of the BOJ's governing board showed that the hurdle to further quantitative easing is high. Some board members were concerned that expanding the central bank's quantitative easing could raise the risk that it would be seen as financing the government deficit.
(3) Draghi’s pledge. On 10/11, Bloomberg reported that ECB President Mario Draghi told reporters in Washington that expanding the ECB’s balance sheet is the last monetary tool left to revive inflation, although there is no target for how much it might be increased. He said, “I gave you a kind of ballpark figure, say about the size the balance sheet had at the start of 2012.” That would be a remarkable increase of €1.0 trillion. On 11/21, in a keynote speech in Frankfurt, Draghi said that the ECB will “do what we must to raise inflation and inflation expectations as fast as possible.” In effect, he backed US-style quantitative easing.
Speaking in Finland on 11/27, Draghi said that the Eurozone needs a comprehensive strategy including reforms by governments to get it back on track. His comments and weak CPI data released on Friday lowered the euro to $1.246 and triggered a new set of record-low bond yields for the Eurozone's biggest economies, with France’s 10-year yield dropping below 1% for the first time.
The Eurozone flash CPI estimate rose just 0.3% y/y in November, down from 0.4% in October. Bank loans to nonfinancial corporations fell €132.0 billion (saar) during October, the ninth consecutive monthly decline, and the 26th in 27 months.
(4) Chinese rates. The People's Bank of China cut its benchmark one-year loan interest rate on Friday, November 21, to 5.6% from 6.0% and cut its benchmark one-year deposit rate to 2.75% from 3.00%. The nation's central bank also hiked the upper limit on deposit interest rates to 1.2 times the benchmark rate from 1.1 times the benchmark rate. The bank said that it took the actions, which were largely unexpected and are the first such changes since July 2012, in response to expensive borrowing costs rather than any direct worries about the economy's slowdown. Chinese bank loans rose 13.2% y/y during October, the weakest growth since November 2008.
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