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G-20 Needs To “Man Up” Or Risk Sparking Market Chaos, Citi Warns
G-20 Needs To “Man Up” Or Risk Sparking Market Chaos, Citi Warns
Over the past month or so, anticipation has built among market participants for some manner of coordinated policy response at this weekend’s G20 summit in Shanghai. The hoped for agreement would ideally be something akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth.
Calls for coordinated action come on the heels of a turbulent January in which collapsing crude, RMB jitters, and worries that central banks are out of bullets have sowed fear in the minds of investors. “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions,” BofA said last week, ahead of the summit.
“Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.”
Whether or not you agree with Lew’s assessment of “real economies” or not, the message was clear. The US isn’t set to support some kind of joint statement on fiscal stimulus and may not even be willing to be part of a consensus on the need to implement emergency measures to juice global growth and trade.
On Friday, the soundbites are rolling in as the world’s financial heavyweights opine on the state of the decelerating global economy and the turmoil that likely lies ahead for markets.
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This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
This Is What Happened The Last Time The Fed Hiked While The U.S. Was In Recession
But while we disagreed with BofA’s countdown timing, we agreed with something its strategist Michael Hartnett said, namely that “gradual or otherwise, the first interest rate hike by the Fed since June 2006 marks a major inflection point for financial markets.”
BofA then laid out several key factors why “this time is indeed different” when evaluating the global economy’s receptiveness to a rate hike:
- Central banks now own over $22 trillion of financial assets, a figure that exceeds the annual GDP of US & Japan
- Central banks have cut interest rates more than 600 times since Lehman, a rate cut once every three 3 trading days
- Central bank financial repression created over $6 trillion of negatively-yielding global government bonds
- 45% of all government bonds in the world currently yield <1% (that’s $17.4 trillion of bond issues outstanding)
- US corporate high grade bond issuance as a % of GDP has doubled to almost 30% since the introduction of ZIRP
- US small cap 5-year rolling returns hit 30-year highs (28%) in recent quarters
- The US equity bull market is now in the 3rd longest ever
- 83% of global equity markets are currently supported by zero rate policies
However, to the Fed none of these matter: only the price action of the S&P500 does, which as everyone knows, is trading just shy of its all time highs so “all must be well.”
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