Ok, so the only thing that really matters right now is this chart:
See the problem there?
There’s an ongoing debate about whether it’s the “stock” or the “flow” of central bank liquidity that matters for risk assets, and as you can see from that rather disconcerting visual, you’d better hope to God it’s not the flow that counts.
Here’s the same chart for bond yields:
So although previous tapering episodes didn’t generally lead to any catastrophic selloffs in rates or equities, the “cliff” (as it’s variously been called) illustrated in Cit’s “forecast” is far more dramatic than anything we’ve seen since the crisis.
That means extrapolating anything from periods during which central banks have taken their foot (momentarily) off the accommodative policy accelerator is probably an exercise in futility.
But in case it’s not (i.e. in case we can glean something worth knowing from historical precedent), here’s Citi with a summary of what we’ve seen in asset prices during “ebbs and tides in global central bank net asset purchases”…
The 2009/10 Global Tapering
From May-09 to Sep-10 the 3-month average of net asset purchases across five major central banks (the US Federal Reserve, the Bank of England, the Bank of Japan, the Swedish Riksbank and the ECB in the euro area) dropped from nearly $215bn/month to zero. This was a result of the US Fed tapering QE1 purchases from around $175bn/month to zero by mid-2010 and at the same time the UK BoE tapered their purchases from around $45bn/month to zero by Mar-10. The first Securities Markets Programme (SMP) purchases in the euro area extended the tapering to Sep-10.
During most of this period the MSCI World (equity) index was rising (see Figure 3) and rose 28% from May-09 to Oct-10 (but with an interim 10% drop from Apr-10 to May- 10). German sovereign 10y yields fell to around 2.5% from around 3.5% in this period, and average 10y sovereign euro area yields also came down from around 4.1% to around 3.3%. US 10y Treasury yields remained range bound until Apr-10 and then dropped from 3.9% to 2.5% by Aug-10. UK 10y gilt yields traded range-bound 3.00- 4.25% until Apr-10 but then dropped to around 3.0% in Oct-10.
A potential extraneous support of these asset price returns is rapid credit growth in China. YY credit growth rose from 12% in Oct-08 to 34% in Sep/Oct-09 before falling back to 18% by Jun-10.
The 2011 Global Tapering
From May-11 to Sep-11 the 3-month average of net asset purchases across the same five economies dropped from around $100bn/month to around $40bn/month as the Fed tapered and ended the LSAP2 (QE2) purchases of US treasuries and Japan temporarily slowed its net Treasury bill purchases when faced by a shortage of supply (see Figure 1).
The Fed tapering continued until Nov-11, but from Aug-11 the ECB began a second round of SMP purchases and from Oct-11 the BoE began a second round of QE that raised the aggregate again. While this was a smaller tapering of purchases it was accompanied by policy rate hikes by the ECB in Apr and Jul of 2011, which would further tighten financial conditions.
As aggregate net purchases tapered in 2011, developed equity markets fell 20% in 6 months between Apr and Sep 2011 (see Figure 3). Global rates also fell during these periods. US 10y sovereign rates fell from 3.3% to 1.8% and average euro area 10y yields 4 from 4.2% to 3.8% over the five month period. There were a number of other major developments during these periods, including the escalation of the euro area sovereign debt crisis (and it could be argued that the escalation of the crisis was not entirely independent of the reduction in purchases). Nevertheless, the moves are large and timed closely with the timing of global net tapering. It is worth noting that there is no sign that the asset price changes anticipated the drop in purchases.
The 2013/14 Global Tapering
From Nov-13 to Feb-15 the 3m average of monthly asset purchases fell from around $170bn to around $70bn. This was mainly the effect of the US Fed tapering QE3 from Jan to Oct-14 (reducing purchases from $85bn/month to zero). In addition, the ECB’s balance sheet was shrinking due to repayment of the LTROs (€510bn of which was repaid during this period), which further tightened global financial conditions at the time. The global tapering ended in Mar-15 when the ECB launched its extended Asset Purchase Programme (APP).
During this period the MSCI World returned about 8.4% and government bond yields fell sharply: euro area 10y yields fell from 2.8% to 0.9% and US yields from 2.8% to 2.1%.
The Current (2016- ) Global Tapering
Since Jul-16 monthly net asset purchases have slowed from around $180bn to around $120bn (as of Jul-17). This has been a combined effect of the BoJ buying fewer securities to achieve their current 10y JGB yield target than they did under the fixed quantity regime (which was ¥80tr/year) and the ECB slowing its asset purchases in Apr-17 from €80bn/month to €60bn/month.
During this period (so far) the MSCI World is up 14.6% and global yields have risen. 10y Treasury yields in the US, for instance, have risen from 1.6% to 2.4% and the euro area average yields from 0.5% to 1.2%.
Ok, so two things.
First, this (from the description of the first tapering episode excerpted above): “A potential extraneous support of these asset price returns is rapid credit growth in China.”
That’s gone. Period. Look (right pane):
Second, and equally if not more important, here is one of Citi’s caveats:
Since 2008, there has not been a period when aggregate AE central bank balance sheets have contracted.
That right there is all you need to know.