On Thursday 4th August Mark Carney delivered a four-pronged package of monetary stimulus to keep the global liquidity party going, after some disappointment from the Bank of Japan last week. Lower for longer remains the message and as long as it lasts then excessive credit growth in emerging markets may well continue to go unpunished.
The US remains the place that could yet escape the global deflationary trap, with Friday's blockbuster 255,000 payrolls providing a glimpse of light for them, despite inflation expectations remaining very subdued at 1.5% over the next 5 years.
Here's an Absolutely Fabulous visual metaphor for the latest bout of monetary stimulus from the Bank of England. Just when it feels like Edina and Patsy's champagne stock is down to its final bottle, a machine kindly provides four more bottles on cue, much like Mark Carney providing his latest four measures to an investor community drunk on never ending liquidity...
Brexit has made Europe more vulnerable to shocks, but Carney’s latest action has refilled investors’ optimism that he’ll just keep topping up asset prices if downside risks crystallise. That’s the glass half-full view; the half-empty one would be that the UK has had to take several large steps just to equalise a negative shock that was self-imposed. Overall, the steps taken by the UK reduce the risks to the downside in the near term, but we retain a third of our previous sterling underweight due to our expectations for lower foreign direct investment inflows.
We remain underweight risk both on a tactical and a medium term basis, with markets seemingly pricing in few risks and relying on continued incremental policy loosening to cope with future shocks. We believe monetary policy is reaching its limits in both Japan and Europe and so have closed out our Abenomics theme. Instead we’ll focus more on the potential for helicopter money in different regions going forward, given the obvious limits of monetary policy.