Returns diminish as central banks act

Louisa Bojesen
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FIVE years on from the start of the financial crisis, have markets become immune to central bank action? Three recently unveiled another batch of stimulus: the Bank of England increased its asset purchase programme by £50bn; the European Central Bank cut its marginal lending rate, cut interest rates by 25 basis points and, perhaps most importantly, cut its deposit rate to zero per cent; and the People’s Bank of China stepped in to cut rates too. What did markets do? Nothing.

Focus has now turned to the Federal Reserve – but minutes from its last meeting show that while America’s central bank is open to buying more Treasury bonds, it’s not ready yet. Fed chairman Ben Bernanke testifies to the House Financial Services Committee this week, but just expect him to repeat QE3 is on the cards if the data continue to weaken.

Not that the Fed has been inactive – it has bought a total of $2.3 trillion (£1.48 trillion) in state and mortgage related debt so far.

We are facing synchronised global weakening, and neither the US nor China can come to the rescue. China announced 7.6 per cent growth for the second quarter of the year, the slowest expansion in three years. Meanwhile the US economy is expected to weaken to around two per cent this year, and Strategy Economics says the Eurozone is set to contract 0.7 per cent.

Today the economic focus is on the US Empire State manufacturing survey and US retail sales, ahead of the Philly Fed on Thursday. We also get US housing starts and building permits for June (Wednesday), along with US existing home sales (Thursday) – good gauges for the real economy.

In Europe, it’s the German ZEW survey and UK June inflation data on Tuesday, with UK unemployment and MPC minutes on Wednesday. Have MPC members started to question how effective quantitative easing really is? Are they looking into other options? We shall see.

Louisa Bojesen is anchor of CNBC’s European Closing Bell.
Twitter: @louisabojesen