World Economy

Central Banks Still Dictating Markets

Central Banks Still Dictating Markets
Central Banks Still Dictating Markets

Markets have jumped into positive momentum after investors reacted favorably towards the equity markets as the possibility of more QE in Europe from the European Central Bank increased following a dovish speech from Mario Draghi late last week and further monetary easing from the People’s Bank of China on Friday.

The latest round of monetary easing from China occurred just a couple of days following confirmation of GDP growth falling below the government target at 7%, reported.

With economic momentum supposed to fall even further next year, there is high doubt of any end to monetary easing in China. The PBOC will continue to do whatever it takes to defend growth targets and reinvigorate economic momentum, regardless of whether it comes through further interest rate cuts or gradual depreciation of the Chinese currency.

On Thursday, the European Central Bank indicated that it is prepared to extend its €1.1 trillion “quantitative easing” program of asset purchases, citing risks to the eurozone and the world economy flowing from the slowdown in China and its impact on emerging markets.

Although concerns over the health of the global economy remain at the forefront of headlines, if investors are going to remain inspired to purchase equities on the motivation of easier access to money following central bank actions then there is potential for further gains.

This is because it is not only the PBOC and ECB who are active in these discussions, but the pressure on the Bank of Japan to unleash further stimulus for its continuously struggling economy is mounting.

The pressure on the BOJ to unveil further stimulus to reinvigorate its economy once more has increased substantially over the recent months, with expectations growing particularly after weak trade data last week. This has resulted in Japanese yen's weakness.

Dollar Rises

The dollar received a slightly unexpected vote of confidence after the complete contrast in both monetary and economic sentiment between the United States and other countries returned to entice traders back towards the major currency at the end of last week. It is also possible that investors decided to purchase the dollar ahead of this Wednesday’s highly-anticipated Federal Open Market Committee decision, with the motivation being that the Fed might shock the markets by carrying out its repeated pledge throughout the past year to begin raising US interest rates in 2015.

The reduced US interest rate expectations are not limited to just slowing US economic momentum, but because the central bank cited global economic weakness as a reason to leave US rates unchanged in September.

Since then, it has been confirmed that economic growth in China has fallen below the government target while economic sentiment in Europe is continually plagued by both low inflation and stagnant growth and concerns remain elevated about the pace of economic recovery in Japan. Under this logic and the statement made by the FOMC in September, it has become very difficult to argue for a US rate rise in 2015.

Regardless of this, the unexpected return of investor confidence towards the dollar and attraction towards equities following the recent central bank developments have spelt losses for gold. The yellow metal dropped by over $20 during trading on Friday, falling from $1,179 to as low as $1,158.

Euro Punished

The euro has continued to receive aggressive punishment throughout the currency markets after the European Central Bank behaved as expected last Thursday and repeated the growing threat of further monetary stimulus while also talking down the bounce in the euro over the past six months. The euro has now declined from its monthly high slightly below 1.15 to under 1.10 in less than two weeks.

It was repeatedly highlighted that the jump in the euro over the past couple of months had nothing at all to do with improved sentiment over the European economy. The only reason for the move to 1.15 in the EUR/USD after it looked destined for parity following a decline to 1.04 around April is because US interest rate expectations were repeatedly pushed back.

The failure of the GBP/USD to close at 1.55 level came back to haunt the bulls, and led to an aggressive sell-off to conclude trading last week. Although the pair has slipped from breaching 1.55 to 1.52 very suddenly, technical traders on the daily timeframe will find that the pair has now dropped below the 50, 100 and 200 moving averages that the GBP/USD has been following strictly for months.