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from Breakingviews:

Markets may flare again without Fed and ECB hoses

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By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

After a January in which emerging-economy fires blew smoke into investors’ eyes, markets are calm again. Somewhat dovish noises from Janet Yellen, the new chair of the U.S. Federal Reserve, have, at first, reassured. But there are good reasons to worry.

Yellen said volatility in global markets did not pose a substantial risk to the U.S. economic outlook. The exclusively domestic line is globally unpopular, but too much Fed concern for the world can have bad effects at home. Crises in Asia and Latin America helped push Alan Greenspan to three interest-rate cuts in late 1998. U.S. internet stocks rocketed, and then crashed, damaging growth. The Fed is trying to learn from burst bubbles’ past.

The situation is similar now. The Fed could stop reducing the pace of asset purchases with newly created funds. A so-called taper pause would be certain to propel U.S. and global markets higher. It would also increase bubble risks after a stellar year for U.S. stocks in 2013.

from Breakingviews:

Markets give central bankers lessons in humility

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Markets are teaching central bankers some hard lessons. The monetary authorities in developed economies are learning how hard it is to switch direction. And emerging markets are showing that no policy rate is right when the economy is wrong.

from MacroScope:

Shock now clearly trumps transparency in central bank policymaking

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The days of guided monetary policy, telegraphed by central banks and priced in by markets in advance, are probably coming to an end if recent decisions around the world are any guide.

From Turkey, which hiked its overnight lending rate by an astonishing 425 basis points in an emergency meeting on Tuesday, to India which delivered a surprise repo rate hike a day earlier, central banks are increasingly looking to "shock and awe" markets into submission with their policy decisions.

from Breakingviews:

Markets could be their own worst enemy in fear binge

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The optimistic investor consensus about 2014 is in danger of disappearing. Investors seem to be having second thoughts about the thesis that GDP growth would be reasonably strong almost everywhere and financial problems would not reach disruptive levels. Markets tumbled last week and have continued to weaken. If investors do not calm down soon, they could spark the crisis they fear most.

from MacroScope:

Auto-pilot QE and the Federal Reserve’s taper dilemma

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 It wasn't supposed to be this way.

When the U.S. Federal Reserve launched its third round of quantitative easing, or QE3, it was hailed as an "open-ended" policy that would last as long as needed. Most important for investors, the pace of the bond buying - which started at a somewhat arbitrary $85 billion per month - would be "data dependent." Especially throughout the spring, officials stressed they were serious about adjusting the dial on QE3 depending on changes in the labor market and broader economy. But as the unemployment rate dropped to 7.3 percent last month from 8.1 percent when the program was launched in September, 2012, the bond-buying has effectively been on auto-pilot for 14 straight months.

Now, some are wondering whether the decision not to at least tinker with the program has made the first so-called taper a bigger deal than it needed to be. "When you don't react to small changes in the data with small changes in the policy then the markets tend to read more into it when you do change policy," St. Louis Fed President James Bullard said last week after a speech in Arkansas. "It makes policy a little more rigid than it maybe should be."

from Global Investing:

Steroids, punch bowls and the music still playing: stocks dance into 2014

Four years into the stock market party fueled by a punch bowl overflowing with trillions of dollars of central bank liquidity, you'd think a hangover might be looming.

But almost all of the fund managers attending the London leg of the Reuters Global Investment Summit this week - with some $4 trillion of assets under management - say the party will continue into 2014.

from Global Investing:

Why did the market get the Fed and ECB so wrong?

To err once is unfortunate. To err twice looks like carelessness.
One of the great mysteries of 2013 will surely be how economists, investors and market participants of all stripes so spectacularly misread two of the biggest central bank policy set-pieces of the year.
The first was the Federal Reserve's decision in September not to begin withdrawing its $85 billion-a-month bond-buying stimulus, the second was the European Central Bank's decision in November to cut interest rates to a fresh low of just 0.25 percent.
The Fed's decision on Sept. 18 not to "taper" stunned markets. The 10-year Treasury yield recorded its biggest one-day fall in almost two years, and the prospect of continued stimulus has since propelled Wall Street to fresh record highs. (See graphic, click to enlarge)


A Reuters poll on Sept. 9 showed that 49 of 69 economists expected the Fed to taper the following week, a consensus reached after Ben Bernanke said on May 22 that withdrawal of stimulus could start at one of "the next few meetings".
But tapering was - and still is - always dependent on the data. And throughout this year, the Bernanke-Yellen-Dudley triumvirate has consistently noted that the labour market is extremely weak and the recovery uncertain.
Going into the Sept. 18 policy meeting unemployment was above 7 percent and the Fed's preferred measure of inflation was well below target, barely more than 1 percent.
Plus, a simple read of the Fed's statutory mandate of achieving "maximum employment, stable prices, and moderate long-term interest rates" should have dispelled the notion a reduction in stimulus was imminent.
"People just didn't want to listen. They just didn't believe that they have to follow the data. They've not been listening, and it's really hard to understand why," said David Blanchflower, professor of economics at Dartmouth College in the United States and former policymaker at the Bank of England.
It was a similar story with the ECB's interest rate cut on Nov. 7 which only three leading banks - UBS, RBS and Bank of America-Merrill Lynch - correctly predicted.
These three institutions quickly adjusted their forecasts after shock figures on October 31 showed euro zone inflation plunging to a four-year low of 0.7 percent, triggering the euro's biggest one-day fall in over six months.

from MacroScope:

ECB rate cut takes markets by surprise – time to crack Draghi’s code

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After today's surprise ECB move it is safe to forget the code words former ECB President Jean-Claude Trichet never grew tired of using - monitoring closely, monitoring very closely, strong vigilance, rate hike. (No real code language ever emerged for rate cuts, probably because there were only a few and that was towards the end of Trichet's term.)

His successor, Mario Draghi, has a different style, one he showcased already at his very first policy meeting, but no one believed to be the norm: He is pro-active and cuts without warning. Or at least that's what it seems.

from Global Investing:

Bernanke Put for emerging markets? Not really

The Fed's unexpectedly dovish position last week has sparked a rally in emerging markets -- not only did the U.S. central bank's all-powerful boss Ben Bernanke keep his $85 billion-a-month money printing programme in place, he also mentioned emerging markets in his post-meeting news conference, noting the potential impact of Fed policy on the developing world. All that, along with the likelihood of the dovish Janet Yellen succeeding Bernanke was described by Commerzbank analysts as "a triple whammy for EM." A positive triple whammy, presumably.

Now it may be going too far to conclude there is some kind of Bernanke Put for emerging markets of the sort the U.S. stock market is said to enjoy -- the assumption, dating back to Alan Greenspan's days, that things cant go too wrong for markets because the Fed boss will wade in with lower rates to right things. But the fact remains that global pressure on the Fed has been mounting to avoid any kind of violent disruption to the flow of cheap money -- remember the cacophony at this month's G20 summit? Second, the spike in U.S. yields may have been the main motivation for standing pat but the Treasury selloff was at least partly driven by emerging central banks which have needed to dip into their reserve stash to defend their own currencies. According to IMF estimates, developing countries hold some $3.5 trillion worth of Treasuries, of which just under half is in China. (See here for my colleague Mike Dolan's June 12 article on the EM-Fed linkages)

from Global Investing:

‘Peace-ing’ together the world…

If only it were this easy.

 

The United Nations General Assembly begins its annual meeting next week with the overhang of chemical weapons diplomacy in Syria and a diplomatic dance over Iran’s nuclear aspirations (and the distrust by much of the West of Tehran’s intentions). That creates a tantalizing prospect of the two, U.S. President Barack Obama and Iranian President Hassan Rouhani, taking a face-to-face spin together on the global stage.

But it was all about getting down to business on Friday at the Grand Hyatt hotel in New York where the UN Global Compact and the LEGO Foundation unveiled a 1.65 meter tall replica of the UN headquarters. UN Secretary-General Ban Ki-moon playfully pointed out his office. He was joined by LEGO Foundation chairman Kjeld Kirk Kristiansen and its chief executive officer Dr. Randa Grob-Zakhary, who want the way children play to be re-defined and the learning process to be re-imagined.

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