LONDON May 17 The world's major central banks
may be shifting their tone subtly from "whatever it takes" to
"we can only do so much".
Financial markets supercharged this year by the
extraordinary monetary stimuli of the top four central banks are
once again asking how long this can last.
Friday's stall of this year's global stocks market rally was
blamed by many on fresh policymaker chatter about when the U.S.
Federal Reserve will or should start to wind down its
bond-buying and money printing programmes, or "quantitative
Ironically, the latest concern about the 'beginning of the
end' of QE is flaring after a week of data from both sides of
the Atlantic showing persistent weakness in the western
economies and an absence of any discernible inflation pressures.
So while few strategists reckon the end of QE is nigh, the
very debate itself may now force investors to rethink the
long-term horizon even if a reversal of investment flows is
"The U.S. and world economy is probably not strong enough to
end the QE effort any time soon," said Philippe Gijsels, head of
research at BNP Paribas Fortis Global Markets. But "the market
itself has had a very steep run and so a pause or consolidation
becomes more likely and would be in fact desirable."
Yet if the big four central bankers are listening to the
counsel of their monitors at the International Monetary Fund and
Bank for International Settlements, then the tone of the debate
has indeed changed this week.
While applauding central banks' success in stabilising the
financial system over the past five years, the two global
monetary bodies on Thursday detailed the risks both of
persisting with extraordinary QE for too long and also the
potentially disruptive effects of turning off the taps.
And highlighting the lack of traction in boosting growth and
jobs, the common theme from the IMF and BIS was that monetary
policy alone may have reached the limits of what it can do and
other reforms and approaches now needed to be considered.
"If the medicine does not work as expected, it's not
necessarily because the dosage was too low," said BIS chief
Jamie Caruana. "Refocusing the policy mix to rely more on repair
and reform and not to overburden monetary policy is crucial
because the balance of risks of prolonged very low interest
rates and unconventional policies is shifting."
Echoing that, IMF assistant director for monetary and
capital markets Karl Habermeier wrote: "Monetary policy cannot
BIG 4 AND DRAGHI'S REPRISE
In the coming week, leaders of all four top central banks -
the Fed, Bank of Japan, European Central Bank and Bank of
England - deliver keynote speeches amid all the unease at a
disconnect between seemingly euphoric markets, struggling
economies and evaporating inflation.
Fed chairman Ben Bernanke testifies to Congress on
Wednesday, Bank of Japan governor Haruhiko Kuroda speaks after
the bank's latest policy meeting earlier that day and outgoing
BoE head Mervyn King speaks in Helsinki on Friday.
Pointedly, ECB chief Mario Draghi returns to the financial
community in London on Thursday for the first time since July
when he drew a line under the euro crisis by pledging to do
"whatever it takes" to protect the shared currency.
Given that phrase also neatly framed the determination of
all G4 central banks to plough ahead with extraordinary monetary
easing - the Fed's stepped up bond-buying plan to cut U.S.
jobless or the 'shock-and-awe' tactics of the new Japanese
government and Bank of Japan - they may all now be taking stock.
What's clear is that investors, if not the real economy,
have run with their plan so far.
Total returns on Spanish or Greek equities and euro zone
bank stocks are up between 40 and 50 percent since last July.
Italian, French and German equities and Spanish and Irish
10-year government bonds have all returned 30 percent or more.
While these have outperformed the 25 percent gains in Wall St's
S&P 500 since then, the latter has powered to all-time highs.
All pale in comparison with the eye-popping 75 percent rise
in Japan's Nikkei 225 in just six months and bond borrowing
rates from the highest to lowest rated sovereigns and corporates
across the globe have fallen or remained close to historic lows.
So if central banks now want to flag an inflection point in
policy thinking, should investors take their cue from that too?
For many, the seismic shift in investor flows is still not
as speculative as it may appear.
Flows to both corporate bonds and largely defensive
dividend-heavy equities this year are still fuelled largely by
an exit from near zero-yielding money markets funds in search of
long-term income rather than quick price rises or capital
It's the success of the central banks in convincing
investors they will not tolerate another systemic or growth
shock that is still driving that exit from cash bunkers.
Far from being excessively optimistic about the world
economy per se, many strategists reckon that investors will only
change that behaviour when the central banks actually succeed in
generating faster growth and credit expansion in the real
economy - changing the inflation and interest rate horizon.
Credit Suisse economists said this was the peculiarity of
the current QE-related "yield grab" - faster growth rather than
low growth or stagnant economies was the bigger risk.
"This vulnerability likely becomes exposed in an environment
of strengthening growth, which should in principle favour higher
yielding assets, but would in practice be dominated by excess