Home' Trinidad and Tobago Guardian : October 25th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 25 • 2015
The European Central Bank s hint at fresh stimulus
measures for the stuttering eurozone economy sent
Asia stock markets and emerging currencies surging
Friday, while the euro held on to losses.
Regional investors were set to end another week
on a positive note, extending an October rally that
has been fuelled by hopes for more monetary easing
from key central banks, including in the United States,
China and Japan.
The gains come after global markets suffered their
worst quarter in four years during July-September,
owing to worries about the Chinese economy.
After its latest policy meeting on Thursday, the
ECB unveiled no new measures, but its head Mario
Draghi said: "The degree of monetary policy accom-
modation will need to be re-examined at our Decem-
The comment inflamed talk the bank will ramp
up its already vast bond-buying scheme---essentially
printing more cash---in a bid to fan chronically weak
inflation and kick-start torpid growth.
With the prospect of more euros flooding the mar-
ket, the single currency plunged Thursday to US$1.1111
and 134.10 yen in New York, well down from
US$1.1339 and 135.65 yen in Asia earlier in the day.
And on Friday in Tokyo the unit bought US$1.1115
and 134.15 yen.
It also fuelled a rally in equities, with Frankfurt
and Paris surging more than two percent while all
three main indexes on Wall Street also enjoyed healthy
The upbeat mood filtered through to Asia as Tokyo
ended 2.11 per cent higher, Sydney gained 1.67 per
cent and Seoul tacked on 0.86 per cent. Hong Kong
added 1.30 percent in the afternoon. Shanghai closed
1.30 per cent higher.
"Mario Draghi and his elves at the ECB practically
confirmed there will be an early Christmas present
in order for the European economy on December 3,"
Evan Lucas, a market strategist at IG, said in an email
"In short, all options are on the table for the ECB,
also meaning the Bank of Japan and the Fed are now
live events as well."
Speculation the Federal Reserve will put off an
expected interest rate hike until next year has gained
traction over the past month as bank policymakers
fret over the weak global economic outlook.
A growth slowdown in China and ongoing troubles
in Japan s economy have also exacerbated talk that
those countries will soon announce more measures,
feeding a rally in financial markets.
Traders are keeping an eye on China, where the
country s leaders are preparing for a top-level policy
meeting---or plenum---next week, with talk of meas-
ures to reform the sprawling state-owned sector to
try to improve efficiency.
Gerry Alfonso, a sales trader at Shenwan Hongyuan
Group in Shanghai, said: "The market expectation
is that the plenum will continue with its policies to
support the economy, particularly in strategically
"The authorities seem determined to support the
economy and that s clearly giving confidence to
The likelihood that monetary policy will remain
more accommodative for borrowers supported high-
yielding, riskier, assets, such as emerging market cur-
In morning trade, the Malaysian ringgit soared 1.31
percent and Indonesia s rupiah gained 0.90 per cent.
The Australian dollar and Thai baht each put on 0.4
per cent while the Taiwan dollar was up 0.33 per-
South Korea s won surged 1.15 per cent, with news
that the country s economy grew more than expected
in July-September also providing strong support.
Europe is going to have zero
interest rates for a lot longer,
and that is going to make it
harder for the United States
to stop having them itself.
On Thursday, the European Central Bank
all-but-announced it s about to start doing
more to keep its nascent recovery from not
being one at all. That could mean buying
bonds with newly-printed money not just
until September 2016, like it has said, but
well past it.
Or it could mean buying more than the
60 billion euro of bonds a month it is right
now. Or buying more than just bonds. Or
even charging banks more to hold their
money by cutting the ECB s deposit rate
further into negative territory.
In any case, though, the ECB seems set
to do something at its December meeting
to try to prevent the emerging market slow-
down from spilling over into Europe and
get inflation moving back up toward its two
per cent target.
It that sounds familiar, that s because it
is. Those are the same problems the US has
now. But instead of thinking about new
ways to stimulate the economy, the Federal
Reserve is getting ready to do less. Why?
Well, unemployment is half as high here
as it is in Europe, so there should be more
upward pressure on inflation.
Look at that last sentence again, though.
That s a lot of faith to put in one of the
most dangerous words in the English lan-
guage---should---when the cost of being
wrong is so high.
Indeed, inflation isn t increasing at all
now even though unemployment is down
to a pretty normal level. At the very least,
that suggests the Fed would be better off
waiting to raise rates until there is some
actual evidence inflation is rising---especially
now that the ECB might cut them.
The simple story is that when interest
rates go up more than they do in Europe,
the dollar goes up against the euro. And if
rates go up in the US at the same time that
they go down in Europe, well, then the dollar
really rises. Think about it like this. Would
you rather buy a German 10-year bond that
pays 0.5 per cent or a US 10-year bond that
pays two per cent?
Investors, especially big European ones,
are answering that question by moving their
money out of euros and into dollars which
has pushed the latter up. The euro went
from being worth US$1.26 a year ago to as
little as US$1.05 in March after the ECB had
started buying bonds and it looked like the
Fed was going to raise rates.
Since then, though, the Fed has put off
its plans to do so, and the euro rose back
to US$1.13---until this latest news. That made
the euro fall 1.67 per cent against the dollar
to US$1.11, and it would continue to do so
if the ECB really expands its bond-buying
at the same time that the Fed hikes rates,
like it s said it might. And, judging at least
by Fed Chair Janet Yellen s words, that s
more of a possibility than it s been in the
Now, a stronger dollar by itself wouldn t
have to mean that the economy would be
weaker. Insofar as the dollar went up because
the ECB s printing presses were gearing up,
it could be a wash.
That s because even though a more expen-
sive dollar would make our exports, well,
more expensive in Europe, it could be offset
by the fact that more monetary stimulus
would make Europe demand more of our
goods. If that were the case, though, long-
term interest rates would be rising. That d
be the market s way of saying that this would
help growth enough that the Fed would
have to hike rates to keep inflation in check.
But what we see instead are long-term rates
that are still only around two per cent. In
other words, investors think the only way
this wouldn t hurt is if the Fed makes up
for it by keeping rates at zero.
So if the Fed doesn t, it could slow the
economy down more than you d think. Con-
sider this: according to Goldman Sachs, just
talking about raising rates has already tight-
ened financial conditions as if the Fed had
actually raised them around three times.
And that was when the ECB was only buying
60 billion euros of bonds a month. It d be
even more of a problem if it was buying
Now, that alone wouldn t be enough rea-
son for the Fed to hold off, but together
with everything else it might be. A stronger
dollar would mean lower import prices, and,
as a result, lower inflation at a time when
it s already too low. And it would also mean
a bigger trade deficit at a time when the
recovery is starting to look a little wobbly.
If two monetary policies diverge even
more in, well, not a wood, we might take
the path every other country that has tried
to raise rates from zero has traveled by---
back to where we started.
Europe just made it harder
for the Fed to raise rates
Asia stocks surge,
euro sinks on
ECB stimulus hint
Links Archive October 24th 2015 October 26th 2015 Navigation Previous Page Next Page