The Week Ahead Is Mostly About Digestion

The information set investors have is unlikely to substantively change in the coming days. The important macro points are known. The first part of February may be about digesting and making sense of that information rather than an incremental increase.   

Investors had been concerned about what has become known as "quantitative tightening" or "QT".  It is the opposite of QE.  Collectively the central banks' balance sheets were no longer to be growing on a net basis. This does not seem to be the case anymore. 

 

The first thing that needs to be thought through is the shift back toward accommodation. The People's Bank of China has announced several steps already, including a swap facility for perpetual bank capital bonds, which seems like a re-capitalization initiative and the suspension of automatic margin calls.  To attract foreign investment, Chinese regulators will allow Qualified Foreign Institutional Investors (QFII) to trade futures and options, for which they have been pressing. 

 

The European Central Bank took the unusual step of lowering its risk assessment before taking onboard updated staff projections.  The dovishness might traditionally have been opposed by the Bundesbank, but Germany is at the center of a slowdown in the eurozone.  Its January manufacturing PMI was revised lower--from the 49.9 flash reading to 49.7--and from 51.5 in December.  Retails sales, perhaps skewed by the accounting of gift cards, collapsed by 4.3% in December.  BBK President Weidmann warned that German growth may undershoot 1.5% (estimate of potential) growth..  

 

A consensus appears to be growing in favor of new long-term loan facility, which would allow banks to roll-over current borrowings before they fall into short-term funding regulations. Also, it may spark some net new interest.  The net effect is that previously, the paying back of the borrowings was projected to shrink the ECB's balance sheet.  This no longer looks likely, and to the contrary, it might even expand a little.  Ideas that the ECB could raise interest rates as early as "after the summer" has been pushed out, with a 10 bp increase not fully discounted until early 2020.  

  

The Bank of Japan recently shaved its GDP and inflation forecasts.  Its balance sheet continues to expand, though at a slower pace than a year ago. Its benchmark 10-year yield again offers a negative yield. In fact, estimates suggest there is around $7-$8 trillion worth of bonds with negative yields.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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