By Mike Dolan
LONDON Oct 5 Investors staring squarely at the
U.S. fiscal cliff may well be ignoring a bigger monetary policy
Many asset managers are puzzled at the how little attention
world markets seem to have paid to the U.S. Republican party's
stiff criticism of the hyper-active Federal Reserve and its
successive bouts of reflationary money printing since 2008.
Given the scale of support the Fed - along with the European
Central Bank, Japanese and British central banks - continue to
provide global asset prices, then it's remarkable how little
markets have been ruffled by next month's tight election race.
This past week's first of three U.S. presidential debates was
a starting gun for a month of intense electioneering that is at
least starting to focus minds on how markets may behave around
the Nov. 6 poll.
To date, most of the talk has been how quickly the next
president and new congressional constellation can dodge the
looming "fiscal cliff", where $600 billion in spending cuts and
expiring tax relief - some 4 percent of U.S. output - kicks in
automatically next year without a wider budget agreement.
But with such an agreement as dependent on the makeup of the
House and Senate as the occupier of the White House, this
budgetary uncertainty has been parked in "watch, wait and see"
mode" until the election outcome becomes clearer.
The running assumption is that one form of 'gridlock'
prevails and a deal gets thrashed out in time. On balance, the
polls point to incumbent Democrat Barack Obama retaking the
presidency, Republicans the House, and the Senate up for grabs.
But if Republican challenger Mitt Romney's strong showing in
the first debate on Wednesday night translates into opinion poll
gains both nationally and in key swing states, then the prospect
of a "clean sweep" for Republicans may have to be priced into
markets rather quickly.
That could well have profound impact on everything from the
'fiscal cliff' resolution and growth outlook to equity sectors
like pharmaceuticals, wary of a rollback of Obama's healthcare
reforms. But upshot of sometimes bitter Republican criticism of
the Fed is potentially even more disruptive for world markets.
Republicans have long argued that five years extraordinary
Fed policies ultimately threaten future inflation and abet
profligate spending in Washington.
Romney has vowed that if elected he would not renominate Fed
chief Ben Bernanke, himself a Republican, to a third term.
And Romney's running mate Paul Ryan is an even harsher
critic, backing legislation that would open up the Fed's
monetary-policy decisions to congressional scrutiny and strip
the central bank of its mission to seek full employment.
Given that the longevity of the Fed's third round of asset
purchases last month is tied explicitly to cutting the jobless
rate, that's a particularly controversial stance going forward.
"If Mitt Romney is elected as the next president there is
going to be a phase during which investors are going to be
concerned that he might remove Ben Bernanke from the Fed," said
Yves Bonzon, chief investment officer at Swiss asset manager
Pictet, which has over $300 billion in assets under management.
"And if that happens, if Romney is elected, you want to
hedge all dollar-debasement trades. That includes gold, the S&P
500, carry trade currencies etc," Bonzon said
REINING IN THE FED
A removal of long-term inflation-risk may be welcome for
some but a likely attendant lurch lower in Wall Street stocks
and inflation-linked Treasury securities, spikes in long-term
Treasury and mortgage borrowing rates and a potentially
export-sapping surge in the dollar may be too hard to swallow
for any new government.
The impact on international markets could arguably be larger
give dollar-printing has been widely cited as buoying everything
from global commodity and food prices to emerging market bonds
Curiously, Reuters latest monthly poll of fund managers
worldwide showed opinion split evenly on whether a Romney or
Obama win would be good for world markets. About three quarters
of U.S. funds said a Romney win would be best, while a similar
share of European funds said reckoned Obama's re-election would
buoy markets most.
One of the reasons for market nonchalance so far is that
many believe pre-election attacks on the Bernanke Fed are just
bluff on the hustings. Faced with the market implications of
shackling the Fed at such a sensitive time, they would like back
down when in office.
But unless a new administration's stance was clarified
quickly, there could be considerable speculation and
"A clean sweep (for the Republicans) would lead to market
turmoil as they quickly tried to work out the implications of a
very different policy approach on a whole set of fronts," said
Andrew Milligan, head of global strategy of the multi-asset team
at Standard Life Investments in Edinburgh.
Latest US opinion polls:World markets after Fed QE1/2:Equities after QE1/2 bouts:Global assets YTD in 2012:Reuters Sept funds poll: