As I have repeatedly asserted—ad nauseam, as some of you tell me—it’s still a central banks’ world, and we just live in their shadows.
The European Central Bank Departs from Orthodoxy
That point was driven home hard yesterday when European Central Bank (ECB) President Mario Draghi, told the world that more monetary stimulus was coming in Europe before the end of the year. First, it is a curious and interesting strategy for a central banker. And you have to give Draghi credit for taking a conservative central bank and turning it into a heterodox policymaking entity. For example, the ECB is pursuing quantitative easing (QE) even as it has negative deposit rates. In this go-around, Draghi threw another orthodox policy out the window by divulging new easing initiatives that are coming down the pike.
Specifically, the October ECB press conference was significantly more dovish than what the market was expecting. During the press conference, Draghi effectively said that the ECB is considering expanding the size and duration of its ongoing QE program. Even more importantly, he alluded that the ECB may further lower the deposit rate, taking it into even deeper negative territory.
It is also interesting to note that the economy in Europe has not slowed down meaningfully. As a result, it seems to me, the new easing policies are quite prophylactic in nature: Their apparent goal is to somewhat insulate the European economy (whose net exports are a large part of it) from what has happened in emerging markets in general—and China in particular.
Not to be left behind, the People’s Bank of China (PBOC) cut its reserve ratio requirement and deposit rates overnight. I expect the PBOC, in their effort to stabilize China’s slowing economy, to continue to cut all rates1 for quite some time.
The Markets’ Reaction to the ECB’s Policy
As you would expect, the markets have reacted quite positively to this clarity from the ECB. Global equities and credit assets of all types have rallied—and the euro has sold off, once again proving that while we may debate the impact of global easy monetary policy on the real economy, its impact on asset prices is unquestionably positive.
And as long as central banks all over the globe remain biased toward easing, the downside of financial assets is somewhat contained. Only the U.S. Federal Reserve may buck that trend at some point; however, even that scenario seems more likely in 2016.
The bottom line, in my view, is essentially the same: Global growth remains modest and challenged in pockets. As a result, global central bank policy should remain quite accommodative for an extended period of time. Global equities and credit remain our asset classes of choice in this environment.
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1 These may include interest rates, capital requirements, reserve requirements, exchange requirements, margin requirements and other rates.↩
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