Two Minutes to Monetary Policy Easing

Two Minutes to Monetary Policy Easing

Global stocks eased a little on Friday after a week long-rally which saw global equities get a much needed reprieve. Europe was the best performer, with major bourses up around 8%, with the US and Asia notching up gains between 3% and 5% overall.

But the release of minutes of the latest Federal Reserve and the European Central Bank meetings threw some proverbial spanners in the works, as the global central bank heavyweights voiced concerns about the current volatile situation. The ECB went several steps further, all but promising further easing at its next meeting in March.

That is indeed why, amongst other reasons, stocks in Europe have rallied more than their global counterparts. ECB president Mario Draghi appears to have garnered widespread support for further action as early as March. Members of the ECB’s Governing Council have expressed concerns about deteriorating market conditions, with some members pushing for immediate action. Hawks remain however, notably in the form of Jens Weidmann, Germany’s Bundesbank president.

With the Eurozone economy growing by just 0.3% in the last quarter, persistent low inflation and pressure on some of Europe’s biggest banks the ECB may just have backed itself slightly into a corner. Investors are still bracing for the actual announcement, as similar conditions in December saw Draghi massively disappointing the markets with just a few minor tweaks to the current policy stance, as opposed to the large-scale changes the market had come to expect.

The Oil Glut Returns

Iran’s refusal to join a coalition of oil producers who are seeking to reduce output and record high crude inventories in the US have caused the oil rally, and indeed the global stock rally, to falter. The latest developments brought oil concerns back to the surface (pun intended), strengthening the cause for oversupply.

Coordinated supply cuts have always proved difficult, and any deal between OPEC and non-OPEC members would be the first such deal in 15 years. The odds are looking increasingly high for those in favour of a cut, as Iran is insisting it wants to return production to pre-sanction levels. This and the still subdued global growth outlook are fuelling (pun not intended) expectations of continuous inventory builds, capping prices and the ability of oil to rally.

Safe Haven Bid Makes a Comeback

Safe haven assets have therefore rallied across the board. Yields on the German 10 year bond fell to a close-to-record low of just 13 basis points (!), and US 10 year yields also hit a new 2-year low of around 1.52%.

In the currency space, the yen is on track for its biggest monthly gains versus the US dollar since the peak of the 2008 financial crisis. It has hit a 2 year high against the Euro, even as the Bank of Japan also delved into negative rate territory. The unprecedented steps taken by the Japanese authorities have raised concerns that any further appreciation in the yen will be hard to stave off.

No Breakfast in Brexit Talks

EU leaders were forced to skip breakfast, as David Cameron’s EU deal talks only broke off at 5.30am after a prolonged debate which saw both sides not too happy about the progress so far. The major point of contention seems to be welfare for migrant workers – the UK wants to curb them for up to 13 years. Both Donald Tusk, the European Council president, and Downing Street are saying that “some progress” has been made but “a lot remains to be done” and that “significant differences” still need to be resolved.

Talks have resumed at 11am, and could drag well into the evening. The UK prime minister hopes to return to base with a deal he can ‘sell’ to the cabinet, before fulfilling a pre-electoral pledge and announcing a referendum on Britain’s membership in the EU. The expected date is June 23.