Global Monetary Policy, Economic Outlook and Market Implications

By Chinedu Okoye 

Overview:

Central Banks of advanced economies seem to have won the inflation battle, but now seem to struggle with an almost impending economic slowdown.

Data from the United States, China and the Euro-Area show some form of weakening in the strenght, and confidence of consumers and businesses prompting similar monetary policy moves in the last two weeks of September.

Summarizing and discussing specific monetary policy actions in thee countries, we find that the economic situation though not identical in these countries, all point to the same thing - a bleak outlook for the global economy.

However opportunities still exist in the markets and our insights in this regard are outlined below. 

China:

China launched a series of stimulus packages last week in a bid to boost consumer spending, as the economy faces deflationary pressure. The People's Bank of cut Reserve Ratio by 50bps and the Seven-day Repo Rates by 20bps. 

Various data released have been pointing to an economic slowdown as a result additional stimulus on the fiscal side is expected as the Chinese government is expected to issue about 2 trillion Yian worth of special sovereign bonds to finance this package.

US: On the other side of the Atlantic the US Federal Reserve cut interest rates by 50bps as well in the week prior to the PBOC moves on softer labor market indicators. 

Euro-Area:

The financial times reported output concerns in Europe as likely to lead to further easing. It stayed that "a string of indicators pointing to the Eurozone’s slowing growth will probably lead to a 0.25 per cent interest rate cut by the European Central Bank next month,..."

This is upon expectations that the European Central Bank would wait till December after two cuts already this year. But Europe seems likely to continue to lead the way in the global monetary easing amongst its peers on an overall bleak Macro outlook.

Bleak Macro Outlook:

Weak inflation data with low PMIs, and so Europe has more growth than inflation concerns. Coupled with a weak US Consumer, and a reluctant Chinese consumer, and in light of the Labor market data (the Composite PMI Employment) the ECB has joined the ranks of the PBOC and the Federeal Reserve in a preepmtive easing cycle.

The ECB was the first advanced economy's Central Bank to begin it's rate cutting cycle on output concerns and having cut benchmark rates twice already, an October cut could see eyes go 25bps lower or more.

Weak inflation data means the European consumer is less confident and somewhat weaker than US and China counterparts and so two more cuts - priced in by Zero Equilibrium Economists - isn't likely to reflate the economy. 

Market Effects: Zero Equilibrium Positioning 

Based on the present global economic outlook, we see opportunities across asset classes;

Gold: As a result of the above we are bearish on the EUR/USD and bullish on all gold pairs (XAU/USD, XAU/GBP), we see a possible shorterm boost for the Greenback against its majors. 

High Yield Bonds: We also favor Corporate bonds over stocks in that quality high yield offers relatively high yields compared to stocks whose dividend are directly impacted by an earnings hit..

Sovereigns: Credible high yielding Emerging market bonds are also attractive to us if an appropriate currency hedge can be applied. A balanced allocation between EM and developed country government bonds/treasuries could mitigate risks.

DISCLAIMER; THIS IS NOT INVESTMENT ADVICE, THE ARTICLE ABOVE IS INTENDED TO ENGAGE FINANCIAL MARKETS ENTHUSIASTS AND ECONOMISTS.