Technical & Fundamental Oil Reports Specialists

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Central Banks still propping up the market

Published Monday, February 1st, 2016

The angst that the markets are experiencing has not been an overreaction, it is a perfectly reasonable and considered response to a series of real worries which perhaps one at a time would be manageable but grouped together look formidable. If there was nothing to worry about the ECB would not be talking about more QE, the Bank of Japan would not be introducing negative interest rates, the Federal Reserve would be more upbeat, the Bank of England would be warning of an interest rate increase, discussion of capital controls to curtail emerging market capital outflows would not be a live issue, the China hard landing debate would be old hat, the Schengen agreement would not be under threat of collapse and fears of a corporate earnings recession would have no substance. These are very unsettling times made worse by the knowledge that there are few if any weapons left in the locker, other than of the beggar thy neighbour variety, with which governments and central bankers can respond.

In a healthy economic environment stock markets would not react so positively as they did on Friday to a very mediocre 4Q US GDP growth number and the shock introduction by the Bank of Japan of a -0.1% interest rate on non-mandatory deposits. The assumption is that the poor US growth number will delay further interest rate hikes. Both are strong signals that the economies of the two countries are not in good health. If there was nothing to worry about a poor US growth number would send equities lower and the desperate emergency measure of charging for leaving money in the bank create alarm. It would be very easy to interpret the BOJ action as a response to the slide in the renminbi and a major development in the unofficial currency devaluation war.

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Posted by David Hufton