Is it different this time?
City Index September 18, 2012 10:22 PM
<p>So much has happened since the collapse of Lehman Brothers this week four years ago. Three rounds of quantitative easing from the US Fed, four […]</p>
So much has happened since the collapse of Lehman Brothers this week four years ago. Three rounds of quantitative easing from the US Fed, four rounds of QE from the Bank of England, five bailouts from the eurozone, two waves of bond purchase programmes and two rounds of Long Term Refinancing Operations from the ECB.
Result: G7 policy rates are at or near zero and equity markets are 5% – 10% away from their record highs. Yet, as eventful as the four years have proven, the first two weeks of September 2012 rank high in relevance and lack of precedence.
Draghi & Bernanke: How Different?
Draghi’s Outright Market Transaction programme stands out from prior bond purchase plans via its ability to combine conditionality, sterilisation and unlimited purchases. Most of all, the OMT has integrated monetary policy into fiscal policy, i.e. requiring nations to abide by fiscal rules in order for their bonds to receive monetary stimulus.
Draghi’s OMT may not be a direct solution to Europe’s high debt/low growth problem, but it buys invaluable time for national governments to pursue their austerity policies by keeping yields in check and markets supported.
As for the Fed’s QE3, it stands out from previous programmes in its open-ended nature to target the labour market and its willingness to see higher inflation surpassing 2% with the aim of reducing unemployment below the stubborn 8% figure.
Another remarkable attribute to the Draghi/Bernanke policy combo is that rarely have the markets rallied ahead of anticipated policy measures and continued to do so after their materialisation. And so it happened; Draghi vows to spend unlimited amounts to drag down bond yields and Bernanke is willing to extend monthly purchases indefinitely – until unemployment declines and remains below 7%.
Such unprecedented policy-making could be just what the doctor ordered for equity bulls to revisit their 2007 record levels and metals to regain last year’s highs.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.