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Markets lost faith with central bank policies

Global stock markets went into a tailspin this week in the absence of Chinese onshore markets.

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Japanese Yen
Source: Bloomberg

With market sentiments already in the deeper end of the pool, frayed emotions were aggravated by the spot of confusion arising from what US Federal Reserve chairperson Janet Yellen said in her semi-annual testimony to the Congress.

European and US equities were in the red for most of the week, where banking stocks were under immense pressure on concerns over creditworthiness, disappointing earnings report and sour loans. To add salt to open wounds, oil fell further, with the WTI crude futures dropping to a new 12-year low. As a result, energy-related stocks were confronted with renewed selling pressure.

The increasing divergence between market expectations and Fed projections around further rate hikes is creating the sort of policy uncertainty that roiled risk markets last year. Financial markets dislike uncertainty, and this was reflected in the aggressive selloff across world markets this week.

There was a flight to safety as investors sought protection for their capital. Treasuries were mostly stronger. Gold rallied above $1200 per ounce to a one-year high. Risk-sensitive yen surged to an over 15-month high of 110.99 against the USD, keeping key 110 in the crosshairs.

Keep the faith

Global central bank policy is increasingly becoming a symptom of what’s wrong with the financial markets and real growth than a cure for economic ills. This suggested that the current policy frameworks are no longer capable of dealing with global requirements. The shift in view was hung out for all to see for most of this year, as market players ‘de-risk’ their portfolios and switched to capital preservation mode. Just like Jon Bon Jovi crooned ‘Tell me baby when I hurt you’ in the song ‘Keep the Faith’, the markets have no doubt telling monetary policymakers that current measures are hurting more than healing.

Coupled with ongoing worries about China slowdown, you have the recipe for a flaccid appetite risk. Can things get worse? To be honest, we may not have seen the worst yet. The performance of Chinese equities when they return next week will be key to whether the global stock rout would go on or not. China is pretty much in its own world due to the relatively close-off capital markets despite recent liberalisation moves. In contrast, the world is considerably affected by what goes on in China. If Chinese equities head deeper south next week, the global market is quite certain to follow.

Week ahead

The shenanigans in the coming week will likely originate from several central bank activity. The Fed will release the minutes from the Jan 26-27 FOMC meeting on 17 February (18 February, 0300 SGT for Asia Pacific), which may not necessarily provide more clarity. ECB chief Mario Draghi is scheduled to speak at the European Parliament’s economic committee on Monday, 15 February. After the Riksbank cut deposit rates more aggressively than expected, the moves have been taken as a pre-cursor to more action from the ECB at its 10 March policy meeting. Draghi’s remarks would be closely watched. In addition, the ECB will publish the minutes from its Jan 21 policy meeting on 18 February. In Asia, Indonesia and South Korea would be setting monetary policy.

EU leaders will begin a two-day summit on 18 February, where the renegotiation of Britain’s EU membership terms is likely to be discussed. On the data front, US housing data and inflation numbers should provide more indication of the strength of the US economy. A bunch of Fed officials will also be speaking next week, including Bullard, Williams and Mester.

Japan will report its Q4 GDP figures on 15 February, where economists expect to see an annualised contraction of -0.8% QoQ seasonally adjusted. Industrial production, machine orders and departmental sales will also be on the tap. China trade figures for January are due for release on Monday, 15 February, while credit and money supply data may be out anytime within 12-15 February. Chinese CPI is slated to be announced on Thursday, 18 February.

Singapore will report its December retail sales figures and exports performance next week, alongside the final estimate of Q4 GDP, where expectations are for a downward revision to 1.8% YoY and 5.1% SAAR QoQ from preliminary estimates of 2.0% and 5.7% respectively.

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