How Windy Is It . . . ? Monday, 9th May 2016 – No.178
How windy was it last week?
It was windy. It was centred around the increasing risks surrounding Europe and the difficulty in pricing those risks. You are spoilt for choice on the uncertainty front with the Brexit vote on 23rd June, the rapid decline in Angela Merkel’s approval rating in Germany, the unstable coalition in Spain, the backtracking of structural reforms in France, the solvency issues of Italian banks and the resumption of default risks in Greece.
To make matters potentially worse, the European Central Bank is taking a wait-and-see approach regarding any further stimulus, perhaps in a bid to force politicians into action. A dangerous strategy to put it mildly.
It is not just Europe though, Japan has also stalled in its stimulus programme. One of the main reasons for being invested in these areas was the acceleration of the quantitative easing policy and the subsequent depreciation of their currencies, which should boost corporate earning. The well has run dry on this thesis for the time being.
As time goes by, we are being forced to come to grips with the grim reality that monetary policy is becoming a diluted antidote to the lingering fundamental and structural impediments to global growth that have yet to be fully resolved since the Global Financial Crisis ended in the summer of 2009. One of the conclusions that can be drawn from this ‘lower for longer’ environment is that central banks will be forced into an even more prolonged period of monetary accommodation, until inflation not only goes up, but stays up.
What does this week have in store for us? It is back to focusing on the central banks again, in what is becoming a ‘central banks’ and ‘data’ merry-go-round. It is once again a ‘Super Thursday’ for the Bank of England, where they will unveil the latest interest rate decision, as well as the latest inflation report. This is made all the more significant with the EU referendum looming, which is having a detrimental effect on economic performance. Governor Mark Carney has already made it clear that the Bank will react more cautiously to any data published before the EU referendum, meaning Thursday’s announcements will be heavily scrutinised and commentated upon.