Global Rates 4Q19: Easing resumes


Easing monetary policy is unlikely to insure against a trade war (or political risks)
Chief Investment Office04 Nov 2019
Photo credit: AFP Photo


While conditions are no longer as pessimistic, lingering demand for safety amid a highly uncertain outlook will keep G-3 yields low for longer. The list of worries has increased in recent months as investors now have to deal with the US-China trade war, risks of a hard Brexit, potential EM stress, and political uncertainties in Hong Kong. G-10 central banks, which are already facing moderate growth, have to contend with these ongoing headwinds. Easing monetary policy is unlikely to insure against a trade war (or political risks). However, central banks have and will try to limit the fallout by making financial conditions even looser.

The Fed and ECB both U-turned on policy. The Fed delivered two cuts in 3Q19 and is non-committal going forward. While these “insurance cuts” were delivered to guard downside risk to growth, further cuts may be less forthcoming if US data stays firm. In any case, US-China trade tensions, while still elevated, have de-escalated somewhat.

The ECB has announced asset purchases and also cut the deposit rate by 10 bps. However, cognisant of the unfavourable side effects of negative rates, a tiering system for bank reserves has also been introduced. We think that the ECB is close to the limits of monetary policy and the fiscal drumbeat will get louder. Negative EUR rates are here to stay, but as fiscal purse strings get loosened, risks to interest rates are balanced at these depressed levels.



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