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26 Feb 2016
Demand boost via asset price inflation make a recovery less likely - Rabobank
Research Team at Rabobank, suggests that the efforts to boost demand via asset price inflation in actual fact make a recovery less likely.
Key Quotes
“There are numerous strands to this line of thinking but the one key element here is that QE weighs on demand both by encouraging saving on the part of younger and older workers (the former as they chase a rising housing market and the latter as they see their future pension income dwindle in line with falling annuity rates) and by diverting gross profits away from “real world” investments.
Instead, rising asset valuations, and the perceived safety net of a central bank put, channel profits into financial securities while declining corporate borrowing costs encourage debt issuance to fund share buybacks and M&A activity.
Trade a loss of policy confidence: Highlighting a trade that appeals were one to have sympathy with our view as regards markets potentially losing confidence in the ability of monetary policy to keep risky assets aloft. This is, namely, long OATs vs. SPGBs. First, a further loss of policy confidence is likely to negatively affect not only equities but also higher beta Euro area sovereigns which, in tandem with Brexit concerns, threatens to pressure peripherals. Second, the “risk off” move this implies stands to underpin the yen and, by extension push JGB yields further into negative territory. More negative Japanese yields, in turn, will further encourage Japanese investors to seek “higher ground” in the form of overseas debt markets. It is this which arguably explains the conspicuous buoyancy of semi-core markets of late. These forces are already at play as evidenced by the recent notable disconnect between 10y OAT and SPGB yields.”
Key Quotes
“There are numerous strands to this line of thinking but the one key element here is that QE weighs on demand both by encouraging saving on the part of younger and older workers (the former as they chase a rising housing market and the latter as they see their future pension income dwindle in line with falling annuity rates) and by diverting gross profits away from “real world” investments.
Instead, rising asset valuations, and the perceived safety net of a central bank put, channel profits into financial securities while declining corporate borrowing costs encourage debt issuance to fund share buybacks and M&A activity.
Trade a loss of policy confidence: Highlighting a trade that appeals were one to have sympathy with our view as regards markets potentially losing confidence in the ability of monetary policy to keep risky assets aloft. This is, namely, long OATs vs. SPGBs. First, a further loss of policy confidence is likely to negatively affect not only equities but also higher beta Euro area sovereigns which, in tandem with Brexit concerns, threatens to pressure peripherals. Second, the “risk off” move this implies stands to underpin the yen and, by extension push JGB yields further into negative territory. More negative Japanese yields, in turn, will further encourage Japanese investors to seek “higher ground” in the form of overseas debt markets. It is this which arguably explains the conspicuous buoyancy of semi-core markets of late. These forces are already at play as evidenced by the recent notable disconnect between 10y OAT and SPGB yields.”