Talking Points:
- The Fed is the only major central bank tightening (more fairly 'normalizing') extreme monetary policy, but the effort is felt globally
- Easing by major central bank counterparts including the ECB, BoJ and BoE among others is losing traction on effectiveness in part due to the Fed shift
- With markets already running far in excess of simple risk-reward measures, the evaporation of the stimulus-fueled risk-run fog jeopardizes stability
See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.
Global monetary policy is losing its sway over sentiment. While the majority of the world's largest central banks are attempting to keep their accommodative efforts (stimulus and or zero/negative rates), the Federal Reserve's influence is proving more influential than its nominal representation may suggest. With this month's 25 basis point rate hike, a tide change has officially been established. While the current pace of one move per 12 months may be excruciatingly slow, it is nevertheless a hawkish climb. As one of the first major central banks to pursue the full implosion in rates and LSAPs (large scale asset purchase program), it is the guiding light of the extreme policy effort and perhaps the measure of effectiveness for such effort globally.
In the past two years, we have seen extraordinary programs fail to achieve meaningful progress on their economic objectives much less generate the market response we have come to expect as vote of confidence from investors. From the European Central Bank, the start of the open-ended stimulus program marked the end of the EUR/USD's remarkable slide from 1.1400 and subsequent upgrades in December 2015 and March 2016 actually led to rallies for the Euro - and declines from key local asset benchmarks like the DAX equity index. The Fed's own effort to level out its balance sheet build up in 2013 no doubt had a hand in this shift in effectiveness. Commitment to actually withdrawal the financial support from the world's largest economy and consumer base for trade partners no doubt had a hand in this change in attitude. The question investors should ask is whether we are closer to the tipping point where the reach for returns has hit reckless extremes and a sensible fear of capital losses amid low interest returns is due to return.
From speculative positioning, we see there is a lot assumed and even more to lose. The record highs on US equities may not be reflected in all regions and assets, but the speculative assumption it represents is commonplace. Excess leverage and pricing draw extreme contrast to record low rates of return and stagnant economic growth. Eventually, the weight of reality will outweigh the buoyancy of complacency. If the Fed can stick more closely to its commitment of three rate hikes in 2017, that could happen sooner rather than latter. Should risk trends collapse in the meantime, the house of cards can fall on its own. We discuss the unstable state of global monetary policy and speculation in today's Strategy Video.
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