Apologies for mixing up two metaphors in the title, I did consider three, (Pandora’s box could have easily been slipped in) but two distinct ‘events’ over recent days have lit the touch paper..oops..there’s the third metaphor. One event moved passed jaw jaw into war war versus a specific economic malaise, the other remains deeply entrenched in the jaw jaw territory.
The UK’s BoE and its specific Monetary Policy Committee have committed to inject more than £75 billion into UK banks by way of QE2. Defence of the policy was swift, according to a senior member of the MPC there is “quite a lot of scope” for a further round of quantitative easing. Martin Weale said that while central banks should not be seen as the solution to the “world’s problems”, a third round of QE is possible. The move is the first change to the programme since November 2009 and provided the clearest signal yet that the Bank thinks Britain is on the brink of a double-dip recession.
Speaking to Dermot Murnaghan on the UK’s Sky News on Sunday, Mr. Weale said that with interest rates so low, the Bank could still pump more cash into the system as it tries to stimulate economic growth.
There is quite a lot of scope for further quantitative easing. Before the purchases that we announced last week, the amount of Government debt in the system was actually higher than it had been before the earlier bout of quantitative easing. There is quite a lot more that could be done but at the same time I think one has to recognise that central banks can’t be expected on their own to resolve all of the world’s problems.
Mr Weale denied that QE simply leads to inflation without stimulating the economy, claiming the situation would be worse without the second round of QE. But he acknowledged there was “uncertainty” about the impact of QE. “I have not heard anyone suggesting that quantitative easing actually inhibits the growth of the economy, that it fails to provide support,” he added. “Some people have suggested that it translates fairly directly into inflation without supporting economic growth, but I can’t see any reason why that should be the case.”
The rhetoric emerging from the latest ‘Merkozy’ (Merkel/Sarkozy) pow wow has appeared to harden literary overnight. The narrative has metamorphosed from blue sky thinking into what appears to be a determined policy. Angela Merkel and Nicolas Sarkozy appear to have turned their fighting talk into a blueprint for launch later this month that will overtake a 12-week old plan that has yet to be put into place.
“We will recapitalize the banks. We’ll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing.” – President Sarkozy.
Naturally the one detail he failed to mention was the fact that all seventeen Eurozone members will have to ratify such a policy, however, coherence is beginning to emerge albeit in a painfully slow manner. If the ‘markets’ can move past the question of Greece’s likely default; considering it inevitable but measuring the likely impact as marginal given a huge recapitalization programme would then already be in place, then the Eurozone leaders may consider it a job well done. What shouldn’t be ignored is Sarkozy’s motives, the impression to his electorate is that he’s working hard on the solution, but he has to impress not only the French but also the markets given France’s credit raring must be under pressure. Italy’s and Spain’s downgrade on Friday afternoon will have spooked the French government, similarly the major French banks’ solvency will be further questioned and tested over the coming weeks particularly given the intervention to save Dexia.
The markets have responded positively to weekend developments, the SPX future equity index is up circa 1%. The STOXX is currently up circa 0.55%, the UK FTSE is up 0.59%, the CAC is up 0.7% and the DAX is currently up 0.36%. The main Italian bourse, the MIB 40 is currently up 1.17%, although at circa 25% negative year on year it has some lost ground and distance to cover.
Whilst on the subject of poorly performing indices as an exercise in sobriety it’s worth considering the value ‘sum’ that’s been erased from the markets as the recent rout took hold. Circa $11 trillion has been wiped off global share value according to Bloomberg. Investors are increasing their volume of bearish trades by the largest number in at least five years, convinced the lowest valuations since 2009 will prove no barrier to losses after $11 trillion was erased from equities.
Borrowed shares, an indication of short selling, climbed to 11.6 percent of stock last month from 9.5 percent in July, the biggest increase since at least 2006, according to information compiled for Bloomberg by Data Explorers, a London-based research firm. Trades that profit when Chinese equities decline have reached a four-year high and bearish bets in the U.S. are the most since 2009, the exchange data show.
The euro has made significant gains versus its major pairs in early morning and mid morning trade. Currently up versus the dollar and yen it has erased the losses of Friday’s sessions. As a point worth noting, despite the trials and tribulations the euro and the Eurozone has undergone over the past twelve months, the euro still advanced on it’s twelve month position versus the dollar, measured from September 2010-2011.
In June 2010 it reached a low of €1.20 and whispers were gathering at the time that parity might be in sight. Sterling’s correlation with today’s euro movement has been evident as both currencies have also fallen versus the Swissy. The dollar has fallen versus four of the majors naturally as a reflection of main market confidence the dollar is always likely to be sold off. This could indicate that the future equity on the SPX is unlikely to experience a reversal in sentiment once the NY session is underway.