MUCH has happened since Lehman collapsed four years ago: three rounds of easing from the Fed, four from the Bank of England, five Eurozone bailouts, two waves of bond purchase programmes and two rounds of long-term refinancing operations from the European Central Bank (ECB).
The result is that G7 policy rates are at or near zero, and equity markets are 5 to 10 per cent off their record highs. As eventful as the last four years have been, September 2012 has been without precedent.
Mario Draghi’s outright market transaction (OMT) programme stands out from previous bond purchases due to its amalgamation of conditionality, sterilisation and unlimited purchases. The OMT combines monetary and fiscal policy, requiring nations to abide by fiscal rules in order to receive any monetary stimulus.
OMT may not be a long-term solution to Europe’s high debt and low growth. However, it buys invaluable time for national governments to pursue austerity policies by keeping yields in check and giving the markets support. The Fed’s latest round of easing also stands out in its open-ended nature, and its willingness to allow inflation to rise above 2 per cent, aiming to bring unemployment below the stubborn 8 per cent mark.
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 unfolded: Draghi vows to spend unlimited amounts to drag bond yields down and Bernanke is willing to extend monthly purchases indefinitely – until unemployment declines and remains below 7 per cent.
Such unprecedented policy-making could be just what the doctor ordered for equity bulls to revisit their 2007 record highs, and metals to once again reach the highs seen last year.
Keep informed with the expert opinion of City Index’s Chief Global Strategist,
Ashraf Laidi by visiting: