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Commodities are in a bit of a wait-and-see mode, with oil struggling to gain momentum in either direction and gold capped by resistance at $1,295-1,300. Meanwhile, financial markets are settling down for the Fed's annual Jackson Hole policy symposium on August 24-26.
Squawk / 07 August 2017 at 18:04 GMT
Blogger / MoreLiver's Daily
Finland
Taperings and asset markets.

The European Central Bank will almost certainly decrease its monthly asset purchases after 2017.

Let's go through couple of charts.

First:
iShares MSCI ACWI ETF (both developed and emerging stocks)
US oil futures continuous
Dollar index future continuous
07 August
Juhani Huopainen Juhani Huopainen
Notice how the May 2013 announcement on the approaching taper led to an immediate market correction, but it was over quickly, and the correction wasn't very deep. When the actual taper started, there was no negative market reaction, as "it was already in the prices".
07 August
Juhani Huopainen Juhani Huopainen
Notice how in August 2014 the promise that the ECB would introduce QE immediately weakened the EUR, and when the actual QE started, the EUR actually bottomed.

The EUR has not weakened at all during the QE, and actually has strengthened recently as the probable tapering day is approaching.
07 August
Juhani Huopainen Juhani Huopainen
Stock markets in 2014 were practically flat, and 2015 saw a deep correction - at the same time as oil price collapsed.

See ABN AMRO's article on "sovereign wealth fund tapering". Before oil collapse, SWF's bought USD 50 billion of assets every month, since the collapse they've been net sellers. The difference is a bit over 50 billion - compare that to the ECB's monthly government bond purchases of EUR 50 billion.

https://insights.abnamro.nl/en/2016/01/global-daily-the-swf-taper-how-big-is-it/
07 August
Juhani Huopainen Juhani Huopainen
In the final chart the black line shows the combined net asset purchases of the central banks.

Notice how the asset purchases hit lows of near-zero in 2015, and in the beginning of 2016 purchases started to increase again.

The global stock market correction in 2015 ended in the beginning of 2016 as central banks' asset purchases increased.
07 August
Juhani Huopainen Juhani Huopainen
Now remember that
1) The ECB will taper its asset purchases after 2017 is over
2) The Fed will likely begin decreasing its balance sheet in late 2017 / early 2018
3) Bank of Japan and other major central banks have practically no room to increase QE
4) This means that the "black line" of net central bank purchases will likely hit zero or even become negative in 2018.

IF both the sovereign wealth fund purchases from oil producers are not coming to the market AND the central banks become net sellers, what will replace the demand for the financial assets, especially at current "challenging" valuations?
07 August
Patto Patto
nice work....
08 August
usxau usxau
Sharp and concise analysis! The question is if the CB's of this world even will allow the equity markets to deflate to more reasonable valuations?
08 August
Cat Cat
Incredibly useful analysis. Thank you for the charts. Makes it compelling to see the correlation.
08 August
Juhani Huopainen Juhani Huopainen
The above suggests there could be deeper market correction coming, something similar to what we saw in 2015.

For that not to happen, oil needs to rally (to bring back SWF-purchases) OR some central banks have to pick up the pieces. Would the Fed return to QE, or ECB extend its own programme? A very dark scenario would have to be realized for either of those two to go full-QE again. Other major central banks simply can't throw around large enough support.

BEFORE a deep market correction the ECB and the Fed won't believe it to be necessary to go full-QE.

I doubt "growth and good inflation" alone would materialize in large enough size to create the demand that has been lost due to SWF (down 50 bn month) and next due to ECB (down from 60 bn to zero in 2018).

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