Tags: europe | china | invest | risks

Don't Be Fooled by Resilient Markets as Risks Abound

Don't Be Fooled by Resilient Markets as Risks Abound

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Friday, 09 December 2016 07:26 AM Current | Bio | Archive

 

At yesterday’s ECB press conference after its Governing Council Meeting we have heard the first hints the ECB could taper, one day, its bond buying program, but at the same time, and that is interesting, the ECB didn’t quite taper its bond buying program at all, which is of course very confusing to many investors.

To say it mildly, yesterday Draghi informed us about the start of an, as we could call it, a stepped program of reduction of bond buying, which is of course not the same as tapering.

The reduction in bond buying to 60 billion euros a month means that the ECB will buy fewer bonds than most market participants expected , me included, to be the case in 2017.

The fact is that it is a stepped 25 percent reduction rather than a gradual slide towards zero, and it is precisely that, that gave Draghi the ability to deny that he was truly tapering by saying: “There is no question about tapering. Tapering has not been discussed today. … As I said, this is an option, not a necessity, and the committees will assess when and if it should become so. As you know, the amounts of purchases and the maturities of purchases do depend on the current constellation of rates, and as this changes so it changes the necessity to buy certain maturities rather than others…” 

Result was that the euro erased immediately its gains of the previous days.

Now, and in this context, Jeffreys International, which is an American global investment bank and institutional securities firm headquartered in New York, shows in a recent study there is a serious chance that Draghi could keep QE for another 2 years, or at least until his mandate as president of the ECB ends in October 2019.

Mr. Draghi also said that he could handle his quantitative policy and if he wanted too, he could go back to 80 billion euro and this wasn’t going to affect him, but in reality by the end of next year, with inflation near the ECB’s target, a tighter labor market and ongoing economic growth, Draghi will have to accept the inevitable and wean himself off quantitative policy entirely. 

2018 will almost certainly see further reductions in bond buying and by that stage Draghi will probably have to admit that yes, it is a taper. 

Perhaps noteworthy, there is indication of a division within ECB Governing Council where some ECB governors said to have pushed for a 12 month QE extension and at least one has voted for no extension at all.

Finally, when asked about the impact that Brexit as well as the new Trump administration could have in the future, Mr. Draghi said: “… the point is that all these events – especially Brexit and the new administration in the United States – have effects that are, by their very nature, going to develop their full dimensions in the medium to long term. So, we'll certainly see consequences of these changes in the medium to long term – not necessarily, as I was saying, in the short term.”

For long-term investors this means, in simple words, the resiliency the markets are demonstrating at present is one-directional, which has always implied that the risks under the surface are on the rise, albeit slowly.

Meanwhile, from China inflation came in somewhat higher than expected with consumer prices rising by 2.3 percent y/y in November compared with a 2.1 percent rise in October. Chinese consumer price data is not especially important internationally other than to note that food price inflation did creep up a little again. 

Producer price inflation was a little more significant as it rose by 3.3 percent y/y in November compared with a 1.2 rise the month before and the Chinese PPI has a subdued international impact. To achieve that it would have to be translated by export prices, which is not the case yet. We should not forget that China’s export industry contributes little more than 1 percent to the global economy, which means while there may be relative price shifts as a result of Chinese price pressures, because when one good rises or falls in price, relative to other good prices, the overall price impact of China is not very significant. 

From a long-term investor’s standpoint, and as I have said here before, the U.S. and the U.S. dollar still remain, at least for the time being, the best location in a bad global neighborhood.

Of course, never forget, nothing is forever.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
For long-term investors this means, in simple words, the resiliency the markets are demonstrating at present is one-directional, which has always implied that the risks under the surface are on the rise, albeit slowly.
europe, china, invest, risks
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2016-26-09
Friday, 09 December 2016 07:26 AM
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