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Monetary Policy from Fed, ECB, BoE Priming Speculative Drop

Monetary Policy from Fed, ECB, BoE Priming Speculative Drop

Talking Points:

  • A gradual shift in global monetary policy towards normalization is slowly dawning on the speculative excess of the market
  • The Fed's Taper and the S&P 500 reaction is a good indication of how markets are likely to react on a global basis
  • With the BoE and BoC speaking of hikes, the ECB testing the waters and speculation doing the rest; change is upon us

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The global tides are changing. The rise of extraordinary accommodation in the form of extreme rate hikes and the implementation of large scale asset programs (LSAPs or more often referred to as QE) marked a turning point in the history books for finance. The coordinated effort helped stave off what could have been a collapse of the global financial markets - and the unexplored economic fallout that would no doubt follow. However, as the recovery extended and the fear receded, the need for the exceptional accommodation was more suspect. Monetary policy was kept in a bid to generate the acceleration in growth that never seemed to take, to impart a questionable advantage in trade and eventually simply to offset the influence of influential counterparts. Competitive monetary policy - often referred labeled currency wars - was employed not just by the more scrappy central banks dependent on their larger counterparts, it was driven by the biggest groups in the world. And, the cost of this effort is starting to become more explicit.

There is a downside to everything. Stimulus and extraordinarily low rates is no exception. One of the more troubling side effects for the central banks themselves is the recognition that their efforts are losing traction. The more recent efforts to introduce and escalate existing programs has seen a marked decline in net gain for growth, inflation, employment and local capital markets. With the policy authorities stretching the bounds of what they have at their disposal, they have put themselves in a position that fighting another onset financial crisis or economic recession will be difficult if not impossible. The speculative market that placed its faith in the limitations of these seemingly infallible groups are in an even more troubling position. They have taken risk exposure well beyond the recommended dosage. They are heavily dependent on the low volatility environment that the central banks have been able to leverage to compensate for the extreme lack of return - it is arguable that these same elements have pushed them to take this risk.

Now, as growth solidifies at lackluster levels and the outlook for inflation picks up; the world's largest banks are changing course. Some are explicit about their intentions and moving aggressively - like the Fed which has hiked rates and laid out its stimulus rundown plan. Others are taking cautious but deliberate steps - like the BoE and BoC which have stated the next moves are likely to be rate hikes. Then there are those that are arguably the most critical to this equation as the rudder for complacency and ill-earning speculative confidence - including the ECB and BoJ. The former has attempted to test the waters with ambiguous rhetoric to see how the market reacts. Each time, the ECB has said something close to a hawkish view, volatility has churned and scared them off. That said, they cannot hold off forever. For the BoJ, a penchant for surprise will likely leave them at the tail of the pack; but FOMO effects all. The full turn is still a ways off, but the markets anticipate and speculation. To get a sense of what the market's reaction will be, we need only look back to the Fed's Taper plans and execution in 2014 and how drained the lift from the S&P 500. We discuss the big picture implications of global monetary turning the corner amid growing evidence that it is underway in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.