Monthly Brief November 2018 – Quantitative Easing! Tightening?

Monthly Brief November 2018 – Quantitative Easing! Tightening?


The more things change, the more they stay the same. Tariffs, interest rates, Brexit and oil, none of which are new topics, continued to be the subjects which drove the capital markets during November.

Trade relations between the US and China continued to be at the top of investors’ minds entering November while the Federal Reserve’s interest rate policy was also closely watched. But as the month progressed, there appeared to be investor fatigue regarding these issues as little of substance was happening while the rhetoric continued to build.

What did catch the markets’ attention was the decline in the price of oil. The far-reaching economic impact it could have was, and is, closely watched by markets as one gauge of global economic health. Changes in its price can provide insight into several economic facets, sometimes being contradictory. For example, lower costs associated with oil’s price decline may be considered a positive for the consumer but may also be viewed as a negative for the energy industry. Overall, it was clearly viewed in a negative light as a warning of potential weakening in the global economy.

But, as has often been the case in times of concern, a statement from the Federal Reserve changed the market tone. Comments made by the Fed chairman during the latter half of November suggested that the Federal Reserve’s cycle of raising interest rates may be closer to an end than previously thought. On cue, global equity markets rallied, finishing generally higher through month-end, with the exception of Europe which was still wrestling with a conclusion to the Brexit issue.

As November concluded on Friday the 30th, the weekend ahead held one big issue for investors to watch, a meeting between President Trump and Chinese President Xi. Coverage of these meetings suggested the discussions had positive tones and early reports implied that global markets would initially react positively. Still, given the history of how the current administration has communicated regarding these types of issues, it will take some time for markets to fully understand the real impact of these meetings on the global economy, likely leading to continued market gyrations.

Since the 2008 Financial Crisis, global central banks have used both traditional and new creative measures to stabilize and support the global economy. One tool has been dubbed “Quantitative Easing” (QE) which generally refers to increasing liquidity in the global economic system. Much evidence has supported the belief that QE has indeed served as one catalyst moving risk markets higher. Yet, in the back of investors’ minds has been the reality that QE can’t last forever and will have to be reversed at some point. And if QE supported market advances, what impact will the unwinding have… potentially a hinderance to further gains?

Watching this, the big three central banks, the US (Fed), Japan (BOJ) and the European Union (ECB), have been in sync until earlier this year when the Fed began to unwind their QE efforts, while the BOJ and ECB have continued QE measures. It is now estimated that November is the first month in which the net activities of these three has been to tighten.

This month’s chart shows the balance sheet of the Fed, which is generally considered to be a very accurate gauge of their QE activities. Prior to 2008, changes in the level of assets was predictable and consistently moving modestly higher. Actions since the financial crisis are quite obvious, with big jumps in total assets between 2008 and 2015. But 2018 has painted a different picture. While it’s unlikely one chart can tell us what’s next in the global markets, the actions of global central banks will certainly be a part of the equation. How big an impact is yet to be determined, but the unwinding of QE has few, if any, precedents to learn from and bears close watching.

James Ferrin, CFA
Chief Investment Officer


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