The new week has begun with mildly weaker risk sentiment. This sees global equity markets lower and the USD and JPY in demand, although the AUD and CAD haven’t been negatively affected by the more cautious tone.
It has been a fairly sleepy start to the new week with a lack of new information to drive markets. Risk sentiment is cautious, following the ramp up of US-China trade rhetoric at the end of last week. Both President Trump and his Secretary of State Pompeo have both publically blamed China for the spread of COVID-19 and covering up the issue. This culminated in Trump declaring that he could implement fresh import tariffs against China. Overnight, Treasury Secretary Mnuchin said that Trump was reviewing options he has to penalise China. So far there has been little evidence of China ramping up imports from the US as agreed in the Phase 1 trade deal signed earlier this year.
Market sentiment has also been held back after Warren Buffet wasn’t particularly optimistic about the outlook at his weekend shareholder meeting, where the range of possible outcomes was said to be “enormous”. Airline stocks are some of the worst performers overnight after Buffet said he had sold all of his holdings. And rather than deploying cash after the equity market rout, his cash reserves have increased to $137b, as he didn’t see any bargains out there.
The S&P500 is currently down 0.4%. J.Crew Group became the first big retail chain to seek bankruptcy protection since the outbreak of the coronavirus pandemic – likely the first of many retailers to go out of business, with others said to be “days away” from going down the same path. Earlier, Europe’s Euro Stoxx 600 index was down 2.7%, playing catch-up to Friday’s fall as the market was closed for a public holiday.
Tonight Germany’s constitutional court will give its ruling on the legality of the ECB’s asset-purchase programme, a case that has dragged on for nearly five years. A negative ruling would be a shock to the market and prevent the ECB from going full steam ahead with its €750b Pandemic Emergency Purchase Programme, which removes many limits that constrained its previous asset purchase programmes.
Some nerves ahead of that judgement see the European currencies at the bottom of the leaderboard. EUR is down 0.7%, and has slipped below 1.09 this morning. GBP is down 0.5% and found some support just above 1.24 overnight.
The risk off tone sees the USD and JPY outperform, although the mild risk-off tone isn’t particularly evident with AUD and CAD. The mild positive tone to oil markets is helping, with WTI hanging in there above the USD20 mark. The AUD is up slightly to 0.6425.
The NZD is the weakest of the commodity currencies, down 0.3% to 0.6045, after finding some support around the 0.6010 mark over the past 24 hours. NZD/AUD traded back below 0.94 this morning. The RBNZ’s aggressive QE stance is NZD-negative as the Bank’s actions continue to drag NZ rates down, with falls to record low levels across much of the curve – NZ’s benchmark 10-year government rate (2031) closing down 4bps to 0.73% and the 3-year bond trading down to just 0.07%. The 5 and 10 year swap rates fell 2-3bps to record lows of 0.31% and 0.69% respectively. Many are beginning to question the RBNZ’s strategy here, given the overwhelming distortions it is generating in the market.
NZ recorded zero new cases of COVID-19 for the first time since early March. Next Monday the government will decide whether or not to ease lockdown restrictions further, with PM Ardern saying that the government would give 48 hours notice of a move to Level 2, implying 14 May would be the earliest date to get to that level. This is increasingly looking like a political decision than a health decision, with the public’s appetite for ongoing restrictions diminishing by the day. At move to Level 2 would see “only” 15% of the economy closed compared to about 25% at the moment.
In the day ahead, Australian payrolls data will likely show further job losses over early April, after a massive 6% of jobs were lost in the three weeks to 4 April. The RBA is expected to keep monetary policy unchanged. Having already reduced the cash rate to its self-imposed floor of 0.25% and its QE policy successfully keeping the 3-year yield near its 0.25% target, the bank has time to assess economic and financial developments amid the pandemic.
The US non-manufacturing ISM tonight won’t tell us anything we don’t know already, so there’ll be more interest in the language used by the number of Fed officials talking overnight.
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The RBNZ’s aggressive QE stance is NZD-negative as the Bank’s actions continue to drag NZ rates down, with falls to record low levels across much of the curve – NZ’s benchmark 10-year government rate (2031) closing down 4bps to 0.73% and the 3-year bond trading down to just 0.07%. The 5 and 10 year swap rates fell 2-3bps to record lows of 0.31% and 0.69% respectively. Many are beginning to question the RBNZ’s strategy here, given the overwhelming distortions it is generating in the market [My bold]
V. The Central Bankers’ Goal
During the last four decades, many asset bubbles and banking crises have marred the economy and pushed society off balance. There have been well over 100 banking crises and subsequent recessions during this time period. These boom-bust cycles have caused an unprecedented transfer of wealth from the many to the few. This redistribution of incomes and wealth has resulted in unprecedented levels of inequality.
This time period also coincides with a period of unparalleled power in the hands of central banks. Under pressure from the IMF and, in Europe, Brussels legislators, country after country made their central bank independent from governments and usually – and surprisingly – also independent from and unaccountable to parliaments. Thus lacking the constraints of the normal democratic process, central banks have been free to choose their tools, targets and modus operandi. They have been entirely free to choose their policies.
The job of central banks has been to engage in monetary policy in order to deliver stable prices, stable growth and stable currencies. However, central banks have thoroughly failed in this, as the frequency and amplitude of business cycles has increased during this time period, and more traditional cycles of growth and recession have been replaced by boom-bust cycles.
The creation of the newest major central bank, the European Central Bank, is a case in point. The treaties that established it granted it unprecedented powers, unchecked by any democratically elected assembly. This was unprecedented, but only in the post-war era. As I argued in my 2003 book Princes of the Yen and an academic research paper (Werner, 2006), the ECB was not modelled on the successful Bundesbank in Frankfurt, but the disastrous prior German central bank, the Reichsbank, which created asset bubble and bust, deflation, hyperinflation and essentially caused the economic chaos that helped bring Adolf Hitler to power, after which the Reichsbank, under the leadership of the same man that had created this chaos in the 1920s, then reflated rapidly, rendering this previously marginal fringe-politician highly popular. The problem with the Reichsbank was its excessive independence and lack of any accountability to German institutions or parliament whatsoever. Thus the founders of post-war Germany were wise to change the new central bank’s status by significantly curtailing its independence: the Bundesbank was made accountable and subordinated to Parliament, as one would expect in a democracy. It became probably the world’s most successful central bank. While the Brussels centralisers, when pushing the Maastricht Treaty (signed in 1992), portrayed the ECB as having been modelled on the successful Bundesbank (also situated in Frankfurt), the truth could not have been further from it. Instead, the ECB was made independent from and unaccountable to any democratic assembly, as well as to governments. The ECB had in fact been modelled on the disastrous Reichsbank.
Based on this analysis, I warned in 2003 that the ECB was likely to abuse its excessive powers by creating vast credit booms, asset bubbles and banking crises in the Eurozone. This it duly did, from 2004 to 2008 in Ireland, Portugal, Spain and Greece, as well as other parts of the Eurozone. As it turned out – and as we know from former ECB head Jean-Claude Trichet’s speech in Aachen in 2011 – the goal of ECB policy was not to create stability. Instead, it was the insidious plan to cause havoc, by creating asset bubbles that could then be pricked, all the while blaming greedy speculators and bankers. The ensuing recession could be used as justification for deep structural reforms (as the Bank of Japan has done in Japan, the Bank of Thailand after the Asian crisis), and, more importantly, in order to introduce a United States of Europe with centralized monetary and fiscal powers. The latter goal of a ‘European Finance Ministry’, so desired by ECB-head Trichet, was essentially achieved thanks to the crisis with budgetary control now residing in Brussels, and a supranational ESM having been established that can de facto operate as European finance ministry, without any democratic accountability – or even scrutiny by any policy force or public prosecutor. A senior member of the ECB council and for many years governor of one of the national central banks that are part of the ECB confirmed in private and off-the record discussion how he was shocked at the democratic deficit of the ECB and how it had abused its powers to achieve political goals, such as in the ‘negotiations’ with the humiliated Spanish and Greek governments.
Central banks are now in the process of consolidating their powers. They wish to get rid of competition in the form of paper money or bank credit. They are driving both cash and bank credit out of business through their negative interest rates, which are not designed to stimulate the economy, but to create deflation and further havoc. – Havoc that they intend to instrumentalise to accelerate their goal of becoming the complete masters of our lives, by allowing only digital currency that they issue and control – and that they can monitor in terms of all transactions, and that they can switch off, if, for instance, some pesky dissident criticizes them too much.
On this road to Orwellian totalitarianism by the central planners at the central banks, it is only a small further step to argue that the little chips on our digital cash cards would be safer – in the name of combatting crime again! – if one embedded them under the skin of our right hands, or our foreheads.
“He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark, which is the name of the beast or the number of his name”
(Rev 13:16-17). Link
This was a really interesting read. Thanks Audaxes.
I also doubt there is any kind of conspiracy and would point to human nature in creating then maintaining intellectual dogma's and hegemony.
I suspect Central Bankers are partly doing what they mostly believe is right, partly trying to sustain their own roles and status and partly scared about doing anything differently to anybody else within their professional and academic fields.
It was a largely ignored bombshell. Christine Lagarde was not accused of obstruction. The reported cited the approach to the Eurozone as characterized by ‘group think’ and intellectual capture. There were no alternative plans on how to deal with a systemic crisis in the Eurozone or a multinational currency union.”Link
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