How the ‘big kahuna’ of central banks may bring reality crashing down on stocks

  • Written by MarketWatch
  • Published in Economics

Pushed aside by investors who have been distracted by politics and trade bickering, central banks are back and demanding attention. And attention they are getting.

With the ink barely dry on that seemingly hawkish Federal Reserve statement, China’s central bank startled some by not following that U.S. rate increase[1]. The Bank of Japan puts out its policy call on Friday — no surprises are expected, but you never know.

And from Latvia, the European Central Bank has just revealed its timetable to start paring back on its easy-money throttle. Ahead of that, the excitement was been building.

“We think the ECB is the big kahuna” among all those central banks, Michael Purves, chief global strategist at Weeden & Co. told clients in a note.[2]

That leads us to our call of the day from Joel Kruger, currency strategist at LMAX Exchange[3], who says U.S. investors may soon find out that what ECB President Mario Draghi and co. are up to across the pond matters a lot to them.

“The global equities market hasn’t been as worried about the onset of policy normalizations over the past several months due to the pace of this process, which has been quite slow, disjointed and restrained,” he says in emailed comments.

“But we are now seeing a more deliberate move in the direction of policy normalization. The ECB’s announcement of the official end of QE on Thursday would further highlight this important reality and could start to weigh more heavily on risk assets,” says Kruger.

Here’s a bit more explanation from Helen Thomas, founder of macro-consulting group BlondeMoney[4]. She says what the ECB has been doing — buying European government bonds and driving the euro lower with negative deposit rates — has forced capital out of that region and into U.S. bonds.

That move has acted as an extra dose of QE for the U.S. bond markets, which has driven investors to look for better-yielding investments in equities and corporate bonds.

“Therefore central banks taking away the punch bowl, particularly in Europe which turbocharged the process, is key for the future of all assets globally,” says Thomas.

Check out: The ECB, not the Fed, is the match that will spark bond market volatility[5]

And see: Why is the ECB facing a ‘close call’ on when to start winding down QE?[6]

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