What are you best at? Running a sprint? Jumping a few hurdles? Or would you rather gear up for the long-haul with a marathon?
Ok, it’s a big policy week and of course it could either way for markets. An awful lot of ECB and Fed easing expectations may well be in the price already, so some delivery would appear to be important especially now that ECB chief Mario Draghi has set everyone up for fireworks in Frankfurt.
This is a guest post from Douglas J. Peebles, Head of Fixed Income at AllianceBernstein. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Brazil’s central bank meets today and almost certainly will announce another half point cut in interest rates, the eighth consecutive reduction since last August. But so far there is little sign that its rate-cutting spree – the longest and most aggressive in the developing world – is having much success in resuscitating the economy.
The Greek vote next Sunday now stands front and centre of pretty much all investment thinking, but the problem is that it may still be days and weeks before we get a true picture of what’s happened, whether a government can be formed and what their stance will be. If the new parliament cannot clearly back the existing bailout, even after a bout of horse-trading, then a game of chicken with Europe ensues. Eurogroup meets again on Thursday and there’s a German/French/Italy/Spain summit on Friday. But G20 leaders gather in Mexico as all this is unfolding, so they will certainly be quorate if some sort of global response is required to any initial market shock. What’s more, the FOMC is meeting Tuesday and Wednesday should Bernanke feel the US needs urgent insulation from the fallout regardless of broader action. But it’s certainly not beyond the bounds of reason that coordinated central bank action materializes next week if markets do indeed go skewways after the Greek poll. They have all clearly been consulting on the issue lately via telephone and bilaterals. And the assumption of more QE is there among investors. Three quarters of the 260+ funds polled by BoAMerrill Lynch this month expect another ECB LTRO by the end of Q3 and almost a half expecting more Fed QE over the same time.
How are we looking? Fluid, very fluid!
In a classic case of call and response, the latest twist of the euro saga has seen the crisis escalate sharply in Spain and Italy (with the attempted cleanup of Bankia the latest trigger for a surge in government borrowing rates in both) only to see the European Commission today invoke major policy responses including the proposed use of the new European Stability Mechanism (ESM) to directly recapitalize euro banks, a single banking union, a euro-wide deposit protection system and even pushing back Spanish budget deadlines by a year.