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Research Market strategy
by Swissquote Analysts
Live Analysis

Dovish Central Banks Support Asset Prices

1

Last week provided investors with a thought provoking dilemma. The ECB extended forward guidance, cut forecasts and highlighted that risk were skewed to the downside. Adding to the dovish feeling of the meeting, ECB announced an additional tranche of TLTRO’s. Our expectations for normalization has been pushed back in 2020 (prior Sept interest rate hike). The market reaction was unexpectedly sharp, we understand the rapid deployment of policy indicates the loose use of powerful tools and inadequacy of central banks defensive growth measures. As for the Fed commentary suggest that growth has peaked. While hardly a trend, the payroll 20k NFP print indicates decelerating growth better than most leading indicators.

Despite significant cost and hype, monetary policy has not driven growth and clearly driven asset bubbles. The relationship between markets and the real economy is loose at best, however, everyone is willing to overlook real weakness when stock prices are elevated. Any tightening by the US Federal Reserve will invert the US yield curve. The Fed must let inflation expectations increase in the short-run and hope it pulls up the long end of the curve. However, the divergence between the market pricing and the real economy is expected to widen in US and Europe: this gap between cheap capital and corporate earnings creates a dangerous void. If price/earning ratios are too high, a fall can become chaotic. 4Q equity correction and Fed pivot indicates central banks are still driven by market fears rather than economic data. And this can become a policy misstep.

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