LONDON Jan 4 If the opening salvos of 2013 tell
investors anything, it's to keep their eyes fixed on the world's
central banks rather than its more volatile politicians or even
Given the U.S. Federal Reserve's latest musings on Thursday
about how long it can safely sustain its current super-easy
monetary policy, that's not as unambiguously positive as it
proved over the past 18 months.
Just a look at the jump in 10-year Treasury borrowing rates
to 8-month highs early on Friday gives a glimpse into what might
happen if dissenting views within the Fed spread when jobless
rates ease closer to its now stated target of 6.5 percent.
An unchanged U.S. unemployment rate of 7.8 percent in
December may suggest that's a story for another time, but the
episode does underline that central bank policy more than any
other factor will continue to dominate global markets' direction
for the foreseeable future.
Relentless bouts of global monetary support via money
printing, bond buying, cheap central bank loans and currency
market intervention overwhelmed stock and bond markets
everywhere in 2012 to lend a decidedly bullish hue to markets
otherwise still riven by fiscal, political and economic stress.
If you'd ignored pretty much everything else last year and
bet solely on the determination of the 'Big 4' central banks -
the Fed, European Central Bank, Bank of Japan and Bank of
England - to doggedly pursue market stability and economic
reflation, then you'd have done handsomely.
Put another way, it was simply the hoary old adage of "Don't
fight the Fed" - or more accurately, and perhaps more ominously:
'Don't fight the Fed, ECB, BoJ and BoE'.
"The Fed, the ECB and the BOJ are more aggressive with their
QE (quantitative easing) operations than at any time in
history," said Stephen Jen, head of eponymous hedge fund SLJ
Macro and long-standing sceptic on the efficacy of central bank
"Even I am turning more optimistic, but still cautiously
so," he told clients earlier this week. "The path of least
resistance for risk assets remains up for now."
SOMETHING FOR EVERYONE
You didn't have to be terribly discriminating last year in
what assets you chose or even have a firm conviction on the
long-term success of the extraordinary central bank activity.
The broadest measures of both developed and emerging stock
markets as well as both investment-grade and 'junk' bonds all
returned 10-20 percent last year. And even the so-called safe
havens of U.S. and German government bonds and gold got swept up
in the slipstream - returning at least 5-10 percent too.
Only if you were still stuck in cash - where real losses in
U.S. dollar bills over the last three years have been bigger
than even the 1970s - would you have continued to bleed money.
Within the hedge fund universe, those funds looking at basic
value and growth strategies or emerging market plays
significantly outperformed the typically more tactical and
nimble macro funds or the often model-based trend followers.
Yet this "something for everyone" asset market upshot is the
clearest illustration of the overpowering influence of central
bank intervention and one that unnerves many sceptics - if only
on the crude but sensible assumption that central banks won't
And ironically, it's the emergence of the long-desired
recovery and reflation that may cause the biggest ructions.
By hastening the end of QE-related bond buying, a pick up in
growth and job creation could at once boost government borrowing
rates and debt servicing bills, tighten mortgage credit and
narrow the perceived undervaluation of equity, drawing even the
wariest funds back to stocks.
Even though the New Year's Eve budget compromise between
Washington's warring factions was widely panned by economists as
an unsatisfactory short-term fix, global stock markets
greeted the swerve from the 'fiscal cliff' with
the biggest one-day rally in six months.
The calculation, not unlike the past two years of euro
sovereign debt crises, has been that if the politicians can at
least avoid a near-term disaster, then the central banks will
keep everything afloat until a resolution emerges eventually.
For good or ill, the revelation of the internal Fed debate
on Thursday therefore packs a punch.
Yet many traders reckon this is still not a dominant story
until 2014. What's more, while the ECB may also be a third of
the way through its three-year cheap loan spree to its banks,
the bloc is also still in recession and there's at least two
years to that payback. The Bank of Japan is even preparing to
ramp up its yen-weakening QE after election pledges made by the
incoming government of Shinzo Abe.
So, don't fight the central banks - either way they go - but
the status quo may prevail for while longer yet.
"Global markets are temporarily over-panicking about the
Fed's FOMC minutes and the suggestion that at some point, some
normalisation of Fed's monetary policy will be necessary. Sorry,
but I knew that," said Societe Generale's emerging markets
strategist Benoit Anne.
"Is the Fed going to maintain an accommodative bias in the
period ahead? For sure, yes. From this standpoint, I am going to
start being nervous when it is time to consider a major
retrenchment of global liquidity. This is way too soon to worry