Daily Management Review

As Central Banks Sidle Toward Exit, Investors Sulk, But No Tantrum Likely


06/01/2017




As Central Banks Sidle Toward Exit, Investors Sulk, But No Tantrum Likely
When a central bank signals that it is scaling back the stimulus that has kept an economy afloat - and lined the pockets of investors, history suggests that financial markets react violently.
 
Investors seem largely unruffled even as an end to ultra-easy monetary policies which have inflated the value of financial assets is being signaled by the world's three leading central banks.
 
Since the global financial crisis provoked the 'taper tantrum' the heavy bond purchases and other policy schemes it had used to flood the banking system with cash would be reduced by the Fed is the thought.
 
That sowed turmoil in world markets from Rio de Janeiro to Jakarta, sent Treasury yields climbing more than 100 basis points, and knocked nearly 7 percent off U.S. stocks.
 
And while the European Central Bank and even the Bank of Japan are cautiously looking to the end of monetary easing, four years on, the Fed is talking about trimming its balance sheet, rather than merely slowing its growth.
 
The fact that policymakers can get their message over without too much drama, investors seem confident about. This month, a couple of policy meetings that could, in years to come, be seen as the beginning of the end of extraordinary central bank support, are scheduled and financial markets are expected to sail through them.
 
"It might be the beginning of a drip feed of how it's going to happen," said Tim Graf, head of macro strategy for EMEA at State Street.
 
"The experience of the taper tantrum will guide thinking about that. They don't need to be aggressive. They don't need to be dogmatic. They can be very gradualist and prepare markets."
 
While most economists expect it to signal by September a scaling back of its asset-purchase scheme, ECB policymakers will discuss closing the door to extra stimulus when they meet on June 8, sources say.
 
And closed-door discussions about an exit strategy are being held by even the BOJ, which has failed to come close to pushing inflation up to its target despite four years of money printing.
 
Even though arguably there is more at stake for markets than there was in 2013, investors are prepared for signs of retreat. Compared to four years ago, one third more assets are now held by these three central banks together amounting to over $13 trillion.
 
"Back then taper wasn't really a word that everybody used in the context of monetary policy and Bernanke spat it out and markets reacted in a shocked way," said Andrew Bosomworth, a senior portfolio manager at one of the world's biggest bond funds, PIMCO.
 
"Now this is widely discussed and highly telegraphed, so I don't think it will lead to that kind of reaction."
 
Any trimming of the balance sheet could take three to four years and it has ballooned to near $4.5 trillion, Fed officials say.
 
The ECB has been scaling back buying the debt of certain euro zone governments where it is approaching limits and while it did not call it tapering, slowed its monthly bond purchases when it extended its scheme in April.
 
And for the BOJ, convincing people that it has a credible exit strategy without giving too much away, is the tricky balancing act.
 
(Source:www.reuters.com) 






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