Macro Monday (week 11): QE for life?
Global Macro Strategist, Saxo Bank Group
Summary: Last week's European Central Bank meeting was a big one, as it confirmed that the European economy is structurally unable to attain 'escape velocity' from quantitative easing... and it's not just Europe, either.
We’ve been calling for a tactical correction in equities – a risk-off move – for some time now, and we are finally getting there. I think we have further to run to the downside, as well, especially as the Xi/Trump summit date keeps getting pushed back.
Last week's European Central bank outing was a big deal, as it basically underlined that escape velocity from quantitative easing is not attainable (something we’ve been talking about for ages), and that holds true for central banks globally.
All this time, we thought the Federal Reserve was setting the benchmark via its move towards normalisation, but it actually has been the Bank of Japan, whose balance sheet is 100% of GDP, that is the bellwether. It's just a matter of time before the ECB and eventually the Fed go back to the balance sheet financial engineering game.
It will take a while to play out and there is a potential US summer inflation tantrum that might complicate things, but its QE for life and a thirst for yield at all costs that will soon resume. Bear in mind this is post-2017 and 2018, two years that saw the best global growth in over a decade at the tail end of the longest business cycle in modern history. Also? We are +$250 trillion in debt, up from $175trn at the time of the great financial crisis.
For those that may have missed it, check out Saxo's Quarterly Outlook on the Global Policy Panic. Also take a look at Saxo FX Head John Hardy's latest FX Breakout Monitor, as well as his take on the ECB meeting.
Finally, be sure to review Saxo Chief Economist Steen Jakobsen's take on Draghi's statement as well.
Wishing everyone a profitable and growth-filled week ahead – comments, feedback and high conviction trades are always welcome.