A tumultuous week on markets ended in an unceremonious flop. Global equities collapsed earlier in the week, with the fears of an imminent debt crises, triggered by the collapse in the Chinese Real Estate giant ‘Evergrande’. The fallout would be felt across global markets, but the feared default payment was deferred for an unspecified period. This is just one of many triggers threatening to explode asset bubbles. The Chinese Central Bank banned crypto-currencies and forbade Chinese business to trade in them, adding further uncertainty to markets.
The FOMC meeting, the Bank of England and the Bank of Japan all held the line, in terms of monetary policy. They all endorsed record low interest rates and monetary expansionism, via continued QE. The Banks have a co-ordinated narrative and the only threat to the modern monetary theory is inflation. The categorising of inflation as ‘transitory’ and temporary, is deliberate and will be exposed. Inflation is here and growing, at an alarming rate across the US. UK and Europe. The ECB President LeGarde confirmed the energy crises engulfing Europe and recognised this would be an enduring problem for growth and inflation. She could not bring herself to recognise the root cause of the problem, Climate Change/renewable energy policies being implemented across the developed economies. Massive gas shortages and price spikes are hitting the UK and European manufacturing, business and consumers hard. This is pouring petrol on the inflation bonfire.
The Fed’s policy reaffirmation was welcomed by equity markets, which rebounded strongly, to eat up some of the huge losses suffered earlier in the week. Take note of the big spike in US Bond Yields, with the 10 year jumping to 1.45%, also supporting the US Dollar. The EUR slipped back to 1.1700, while the Yen hit 110.70. The Bank of England conformed to Fed pressure and the result was a fall in the GBP, which slipped back to 1.3660.
Commodity currencies are beneficiaries of monetary largesse, with support across asset classes to global monetary expansionism, although sagging commodity demand has been more than a counter recently. The rise in US Bond Yields and the US Dollar did suppress the associated currencies to close out the week. The AUD fell back below 0.7250, while the NZD looks to test the ‘Big Figure(0.7000)’, on the downside.
The weekend will see the departure of the Merkel lead Government with the German election looking likely to produce a left-wing coalition Government. Not at all a desirable outcome in troubled economic times. Look for Growth and Inflation data to drive the narrative on markets.