Sounding the death knell for QE

If a tree falls in a forest and no one is around to hear it, does it make a sound? When the European Central Bank (ECB) finally bit the bullet and called time on its asset purchase programme last week, its hawkish announcement passed almost unheard by the markets. The euro did fall 1% against the dollar, presumably on concerns that the eurozone economy might still need the life support. But there was a negligible decline in bund yields, while most major European equity markets rallied in response to the announcement.

As the bell tolls for QE, its much-anticipated demise will now be mercifully swift. Having initially planned to buy just €1 trillion of bonds, the ECB has now expanded its balance sheet by more than €2.6tn. But from October, the pace of asset purchases will be slashed by half to €15bn per month, with the whole programme grinding to a halt at the end of this year.

While heralding the end of QE, as ever ECB President Mario Draghi added a number of caveats to give the governing council some wriggle room in case a Southern Mediterranean Banking crisis were to materialise, or some other unspecified event. The sweetener to this more hawkish statement was the reassurance that interest rates would not move higher till the third quarter of 2019.
European equities in general have performed worse over the last six months than the vast majority of markets across the globe. Even before the Italian political crisis, the economic signals were waning and we’ve anticipated a slowdown in eurozone activity since the third quarter of last year. The reversal of fortune has caught many recent Europhile converts off guard, so further volatility in European equities, or renewed euro weakness, can’t be ruled out on any disappointing data or political flare-ups.  

That said, we don’t believe that the Italian problem could morph into another regional debt crisis. The contagion has been limited, the architecture of the Economic Monetary Union is very different today compared to 2011, and numerous backstops have been implemented for countries that agree to play by the rules.

Source: FE Analytics, data sterling total return to 15 June

Trump, trade and tariffs

Over in the US, simmering trade tensions with China cranked up a notch as it was confirmed on Thursday that the Trump administration will start to implement its $50bn package of  tariffs on Chinese goods imported into the US.

Closer to home, the future of trade also remained under a cloud of Brexit uncertainty, with the government narrowly escaping defeat on a Brexit bill by agreeing to further talks with remain-leaning rebels in its own party. The end result may be a softer Brexit, with more dissent expected as the EU Withdrawal Bill returns to both houses of Parliament this week. That may be good news for the UK economy, if not its current political leaders.

Equity markets across Asia met the news on US tariffs with a mixed response. And in a further boon to sentiment, the Federal Reserve at its most recent meeting signalled that four rate hikes were likely this year as growth accelerates, rather than the three it previously indicated. But investors aren’t entirely convinced, with some seeing an increasing risk that the Fed could tighten rates too fast, triggering a slowdown in the economy in 2019. 

The depth of vision in Donald Trump’s 280-character policy statements seems as shallow as a puddle most days. As ever, the details of the tariff package itself remain sketchy and threats of retaliation quickly followed. 

Relations with America’s immediate neighbours to the north and south also soured as the Twitter trade rhetoric ramped up following the recent acrimonious G7 meeting. Efforts to renegotiate the North American Free Trade Agreement now seem under threat, with potentially harmful results for US automakers and other industries benefitting from trade with Canada and Mexico, as well as their workers.

As the prospects of a global trade war increased, investors responded accordingly, though US shares ended Friday only slightly in the red. Stock markets across Europe also declined following President Trump’s announcement on China, extending the downside into Monday morning.

And yet, could this bombastic form of government by Twitter actually be working? This is not to say that we agree with Mr Trump’s policies, or think he’s a force for good in the world. But we live in a modern world where the Silicon Valley mantra of “move fast and break things” has moved into the public sector. Maybe that’s the key: Republicans can campaign at the mid-terms by saying, “Look at the stock market, look at record low unemployment and strong GDP growth; and we are standing our ground against China and the G7.”

This message, it seems, resonates with the average American. Perhaps this, along with Mr Trump’s tax-cuts and aggressive optimism are why American consumer and business confidence are flying high.

Bonds

UK 10-Year yield @ 1.33%
US 10-Year yield @ 2.92%
Germany 10-Year yield @ 0.40%
Italy 10-Year yield @ 2.62% 
Spain 10-Year yield @ 1.30%
 

Economic data and companies reporting for week commencing 18 June

Monday 18 June

US: June NAHB housing survey

Tuesday 19 June

EU: April balance of payments, construction output
US: May housing starts

Final Results: Ashtead Group; Telecom Plus

Wednesday 20 June

US: Existing home sales

Final Results: Berkeley Group Holdings; Severfield

Thursday 21 June

EU: June consumer confidence; France INSEE business confidence
UK: Bank of England rate decision (no change expected)
US: June Philadelphia Fed survey; May leading economic indicators; Federal Reserve bank stress tests results released

Final Results: Dixons Carphone

Friday 22 June 

EU, US: June flash manufacturing and services PMI