Market Commentary | The ECB’s taper tantrum

Three years after the US Federal Reserve brought the term ‘taper tantrum’ to the bond market, it is said that the ECB is also considering the idea. In essence, tapering means gradually reducing the monthly pace of asset purchases until the programme is exhausted. Currently the ECB is buying around €80 billion in bonds every month, and may taper this in steps of €10 billion a month. In true central bank fashion, the officials familiar with the matter said they did not exclude that quantitative easing could go on beyond March 2017 at the current (full) pace.

European bond prices fell in response to the news. This is, in itself, quite a rational reaction to the prospect of a less expansionary monetary policy, but it’s worth remembering that QE is only one element of monetary policy. Even after the programme is officially concluded, cash from maturing bonds will be reinvested, meaning the ECB balance sheet will not shrink. The ECB also launched a number of targeted long term refinancing operations (aptly named TLTROs) which actually pay out money to those who borrow. The last TLTRO matures in March of 2021.

There is no official statement from the ECB yet, but expect questions from the press when the ECB meets on 20 October for its penultimate meeting of the year. Ultimately, as ECB President Mario Draghi has repeatedly said, any decision will be driven by the outlook for inflation.

IMF Outlook

“It’s essential that policy makers adopt a comprehensive approach that supplements overstretched monetary policy with fiscal measures and structural reforms”. That might sound like it was taken straight out of any ECB Governing Council press conference of the last two years, but it’s actually a statement made by the IMF in its latest update to its World Economic Outlook on Tuesday.

Chief economist Maurice Obstfeld echoed Draghi by calling for supplementary fiscal and structural reforms in a world where monetary policy seems to have run its course, but also highlighted political risks which threaten to derail an already fragile global recovery. In particular, Britain’s exit from the EU and the US presidential election have highlighted growing concerns by large sectors of their respective populations about the benefits of cross-border economic integration. This could potentially spill over to other countries, fueling tariff wars and protectionism.

The IMF maintained the growth outlook established in July for the global economy in 2016 and in 2017, but downgraded its assessment for the US economy by 60 basis points this year and 30 basis points in 2017. According to the fund, the world’s biggest economy will now grow by 1.6% this year, and by 2.5% in the following year.

Pound Keeps Tumbling

British ex-pats – look away. EUR/GBP just hit a 30-month high of 0.8820, in the wake of British PM Theresa May’s commitment to trigger Article 50 of the Lisbon Treaty by next March. The news sent UK stocks flying to multi-month highs, but the same could not be said for the currency which fell notably against all its peers. Against the US dollar, the pound hit a 31-year low as Brexit fears were compounded by a string of better-than-expected economic data from the US.

With the Bank of England on the back foot – the central bank recently cut interest rates and said it’s willing to do more – it’s hard to see how the currency can sustain a recovery until the Brexit fallout can be significantly measured.

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.