Dean Popplewell | Apr 23, 2013 06:52AM ET
It seems that owning the dollar is again fashionable – the market is back to “buying dollars, wear diamonds” thanks mostly to risk-averse signals from commodities gaining traction after weak German and Chinese PMI’s this morning. The greenback is currently the chosen one, the best of a bad bunch, as global data begins to turn south. Euro-zone private sector activity has declined again this month, providing more support for the G20 debate pushed last week – that the Eurozone and the UK should consider shifting away from austerity and concentrate on policies that stimulate regional growth.
The debate between austerity and more QE is getting louder. Japan was able to sidestep their aggressive easing strategy and weaker currency debate at the G20 only because most members have now shifted their focus towards the global growth debate concerns. At what point is QE too much QE? Next week’s FOMC meeting should have been about an exit strategy, however policy makers focus seems to have now shifted ever so slightly to renewed worries about US growth and a sharp pull back in inflation expectations. So, instead of “exit strategy” expect the market to be contemplating discussing ‘a more’ stimulus debate. The problem – there will come a time when the Fed will be buying too much debt product making it a difficult pill for investors to swallow as yields eventually will be too low and not attractive – eventually the everyday investor will be demanding a higher return.
The expectations for an ECB rate cut are beginning to show through Capital Market price action. The next debate will be over how much of an impact would a further ECB -25bp ease have? Will it be enough to help the SME’s? The ECB probably needs to be more aggressive – pushing deposit rates into negative territory would certainly have more of a money market impact. The EU policy of austerity is beginning to lose public backing and Germanys Merkel needs her public for her September elections.
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