Investors’ attention this week shifts to the awaited policy meetings by the US Federal Reserve and the Bank of Japan, to be held respectively between today and tomorrow.
Chances of a further US interest rate hike later today are slim, as Janet Yellen is widely expected to maintain a dovish tone as weak global macro-economic factors continue to stall a US recovery.
The policy meeting by the Bank of Japan (BOJ) could have a larger material impact on financial markets as investors await to see how the BOJ will tackle an appreciating Yen and declining inflation expectations in an already ultra-loose monetary environment.
It will surely be of interest to the European Central Bank (ECB), whose own quantitative easing (QE) measures have thus far failed to boost consumer confidence and inflation expectations across the Eurozone.
Monetary policy has been in the foreground over recent years, ever since the financial meltdown of 2008. The US has been successful in reviving economic growth through the implementation of QE.
The measure, although unconventional has helped flood the markets with increased money supply through government bond purchases, giving financial institutions added capital to boost lending and liquidity at lower rates of interest. The measure has permitted many companies to refinance at lower rates. Despite its success, the US had implemented three tranches of QE before noting signals of improvement in the economy.
QE of late in Europe, has done little to replicate the success it had in the US, as consumer confidence over the past year has been lost amidst the energy crisis and geo-political factors affecting the economy, leading to low levels of global demand. Such factors have in fact led the International Monetary Fund to recently lower their global growth rate forecasts for the coming year.
Having said that, oil in recent trading sessions this week has continued its recovery, leading investors to believe the commodity has reached a bottom. The recovery was primarily brought about following recent discussions held between the major players in regard to the possibility of an oil freeze.
Should stable oil prices assertively boost consumer confidence, the current QE measures adopted by the ECB and BOJ alike could well show positive results vis a vis growth and inflation expectations sooner than expected.
Unfortunately the volatility and uncertainty present, restricts an otherwise predicable direction a rebound in oil prices could have on financial markets. As seen over the past few months, the monetary policy measures, which historically have been successful, have failed to achieve the desired market reactions, leading us to believe QE as a monetary recovery tool alone may well be behind us.
Tomorrow’s meeting by the BOJ could see unprecedented actions being taken in the hope of avoiding a deflationary spiral being triggered as a result of weak domestic demand.
The ECB, meanwhile, will be hoping it won’t have to revert to such measures of its own. This week, the ECB had its doubts on including contingent convertible bonds in its asset purchasing program as these have been the pillars of recent volatility over recent weeks.
All in all, fiscal reforms on a euro-wide basis, in my opinion, should be the main focal point in complimenting the current waves of monetary policy. Though, as such reforms take a while to get voted in, focus will eagerly shift onto the BOJ tomorrow, in the hope a potential QE extension is successful.
Should it be, a weight will surely be lifted off Mario Draghi’s shoulders through the comfort of knowing that monetary policy alone as a recovery tool is not fully yet behind us.
Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.