In December 2018, BofA’s Ajay Kapur penned an urgent message, imploring central banks to “please reflate”.
Although market participants were, at the time, skeptical about the prospects for another coordinated easing push, it didn’t take long for policymakers to come around.
Starting with Jerome Powell’s January 4 comments in Atlanta, central banks the world over embarked on a coordinated dovish pivot designed to head off a downturn, help offset the drag from ongoing trade frictions and rescue markets – not necessarily in that order. We’ve seen cuts from the Fed, the ECB, RBNZ, the RBA, the RBI, and on and on. QE has been restarted across the pond, policymakers have enhanced forward guidance and the Fed has begun to grow its balance sheet anew.
As you can see from the visuals, the tide is turning. The top chart is key. The global monetary base is expected to be growing again by mid-2020.
BofA’s Kapur (mentioned above) is now cautiously bullish.
“At the end of last year, we were in a minority [as] most market participants seemed focused on how much the Fed was going to tighten, and when the ECB would be raising short rates”, he wrote this week, adding that “both these central banks are now EXPANDING their balance sheets [and] this is manna from the printing press heaven for Asia and EM equity markets”.
Indeed, there are signs of a bottom in growth sensitive assets. The following visual illustrates the point:
And as of last month, 12 of 41 countries were witnessing a positive 12-month change in their PMIs. That was double the number from July.
There are, of course, some caveats, not least of which is that China’s credit impulse is not witnessing the same kind of dramatic inflection as during previous rebounds off lows in the global manufacturing PMI. But cautious optimism is the order of the day.
Bloomberg’s Richard Breslow underscored this in his daily missive, which contains some amusing passages, all delivered in his signature cadence. To wit:
Sometimes, optimism can be self-reinforcing. Other times, it’s just wishful thinking and things head right back into the sewer. Luck counts, too. Something the world hasn’t had a lot of. And it’s a mistake to discount the influence of political expediency, which is finally beginning to weigh on politicians everywhere. They don’t always respond with the best long-term solutions, but markets don’t mind can-kicking. Nevertheless, upbeat is the moment’s cautious mood. Good for a trade, if nothing else. It’s worth asking whether it will affect traders’ behavior. And it just might.
Breslow suggests bond traders might now flip the post-crisis “logic” (and the scare quotes are there for a reason) on its head. Rather than buying bonds and selling them to someone else at an even higher price amid the duration infatuation and inexorable slide in yields, he suggests bonds may get “sold on rallies on the expectation they can be bought back at better levels”.
As for risk assets, BofA’s Kapur says that “market agony and over-analysis of the trade war has kept the narrative negative, and created massive opportunity costs for reluctant investors”. That could mean performance chasing becomes “highly likely”.
But it’s Kapur’s quick take on what the cross-asset bonanza catalyzed by central bank largesse means for society that sticks out.
“In stark contrast to 2018, all asset classes have risen this year”, he writes. “The wealth effect on global plutonomists will be massive, boosting economies and consumption – dominated in size and volatility by rich people”.