In mid-September the U.S. stock market shrugged off a host of geopolitical concerns to set an all-time high, a feat it has accomplished every month of this calendar year. Yet markets became jittery shortly after Fed Chair Janet Yellen confirmed the central bank’s widely expected intention to reign in the experimental policy now well-known as Q.E.
In the midst of that uneasiness European Central Bank President Mario Draghi made a statement that simply pushed investors over the edge. In the conclusion to a speech in Brussels on the 22nd Draghi said “no monetary – also no fiscal- stimulus can ever have a meaningful effect without (such) structural reforms.”¹ The message was clear: radical monetary policy has been effective in dramatically reducing the borrowing costs for debt-laden countries yet fiscal reform is lacking and economic growth remains elusive. In other words, the central bankers have bought time and higher asset prices, but printing money can’t buy growth.
Global markets spent a week coming to terms with the limits of monetary policy before substantial losses became a daily routine. The losses left major stock market averages down 7-10% from the prior month’s highs. With each passing day there seemed to be increasing disbelief that central bankers had the tools, willingness and political means to implement the policies needed to either pacify the market or produce substantive results.
It took only a few sentences from Yellen and Draghi’s colleagues to turn things around. St. Louis Fed Governor James Bullard suggested in a TV interview that “a logical policy response at this juncture may be to delay the end of QE.”² Shortly thereafter Benoit Coeure suggested his European Central Bank would begin asset purchases “within days.”³
And with that the markets recoiled, establishing a new all-time high within just ten trading days.
Lest there be any confusion, global markets “are all about that Fed” (and its international counterparts), to borrow loosely from Meghan Trainor’s chart-topping lyrics. In a world where markets are increasingly disconnected from economic fundamentals, it is the prognostications and promises of central bankers that dictate market prices.
October ended with a surprise, yet fitting Halloween treat from the Bank of Japan. An announcement that they will purchase bonds, exchange-traded funds and even real-estate investment trusts pushed their stock market up nearly 5% in a single day. The purchases will be financed with additional money printing, further bloating the country’s already large monetary base. The pop singer’s lyrics appear relevant once again. “Yeah, my Momma she told me don’t worry about your size.” The market certainly agrees – at least for now.
1- Draghi, Mario, “Introductory remarks at the EP’s Economic and Monetary Affairs Committee” 22 Sept 2014 http://www.ecb.europa.eu/press/key/date/2014/html/sp140922.en.html
2- Matthews, Steve and Craig Torres, “Bullard Says Fed Should Consider Delay in Ending QE,” Web 16 Oct 2014 http://www.bloomberg.com/news/2014-10-16/bullard-says-fed-should-consider-delay-in-ending-qe.html
3- Kaza, Juris, “ECB to Start Asset Purchases Within Days, Says Central Banker Coeure” Web 17 Oct 2014 http://online.wsj.com/articles/ecb-to-start-asset-purchases-within-days-says-central-banker-coeure-1413541566
“Chart topping” “pop singing Lyrics” Love the analogies and insight. Who has the courage and support to re-establish sound fundamentals? Germany?
At present Mario Draghi appears to be on a collision course with the fiscally responsible Germans.
Just today Draghi (in Frankfurt of all places) sent a message to dissenters by saying he doesn’t think “unanimity” is necessary to “proceed on QE.”
It is fair to say additional debt, experimental monetary policy and negative interest rates aren’t currently popular in Germany. It will be interesting to see if their opposition softens as the country flirts with deflation though.