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    Will Central Banks come to the rescue again?

    As risk assets have fared very badly at the beginning of 2016, there are hopes that some of the world’s top central banks will offer some more stimulus, which should help soothe investors’ nerves.  Although a correction in stocks should normally be welcome given their near 7-year continuous assent (since 2009) without a bear market (at least in the US), there is quite a lot of nervousness among policymakers about the fragility of the global economy.  Specifically, policymakers might become worried that too steep a fall in asset prices might depress household spending and struggling investment.

    An additional worry by monetary authorities is that the drop in the oil price could lead to very low inflation or even deflation.  This could provide an additional incentive to loosen policy by the world’s major central banks.  Inflation targets seem more distant given the latest drops in the oil price.

    To be more specific, the two central banks that are tipped to provide stimulus soon are the Bank of Japan and the European Central Bank.  Other central banks of commodity exporters such as Canada, Australia and New Zealand may lower interest rates during their coming meetings.  The Federal Reserve in the US could decide to delay its interest rate hikes, while the Bank of England will in all likelihood remain on the sidelines and this will hardly surprise the markets.

    For the yen and the euro, it will be very interesting if both the Bank of Japan and the European Central Bank decide to boost their quantitative easing programs while at the same time risk aversion boosts the euro’s and the yen’s allure as safe havens.  If there is aggressive expansion of monetary stimulus in two of the world’s largest economies while risk appetite does not turn positive, it could lead to gold rising further and for the yellow metal to become the preeminent safe haven trade rather than the yen or the euro.  Gold made a two-month high today at $1,117 an ounce before backing down to $1,112.

    However, the central banks should in theory be reluctant to engage in additional monetary stimulus in order to prop up ailing asset markets.  Such policies and stimulus could lead to new asset bubbles and doubts have started to emerge about the effectiveness of such policies in the real economy.  For example, the Bank of Japan is already running the largest Quantitative Easing program in the world and inflation has still not picked up in the country.  In the Eurozone, there are deep divisions within the Governing Council as to the appropriateness of such tools and whether they should be expanded.  The divisions were most clearly seen during the December meeting and the markets were recently more careful to take Mario Draghi at face value when he sort of promised fresh action in March.  Therefore, the timing as well as exact stimulus measures to be unveiled remains to be seen and there will be uncertainty in this regard.  This is likely to be a very important theme – together with developments in China and in the oil markets, that will guide trading moving forward.

    Risk Warning: Forex, Commodities, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you fully understand the risks involved and do not invest money you cannot afford to lose. Please refer to our full Risk Disclosure.

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