Week End Blog – Central Bank Surprises!

This was a week full of surprises, most of them delivered by central banks. And the best one was saved for last. In a truly surprising move, the Bank of Japan decided to increase its already impressive target for enlarging the monetary base from 60-70 to 80 trillion yen.

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If that wasn’t enough, just a few hours earlier, Japan’s biggest pension fund, size a mere $1.2 trillion, announced that it will indeed raise the strategic weight of equities in the portfolio. Both the share of domestic and foreign equities will go up from 12% to 25%. You do the math.

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Add these two surprises together and this is what happens. Eureka!

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Next surprise! US GDP growth for the third quarter comfortably beat estimates. The economy grew 3.5% on an annualized basis, 0.5% higher than expected. Together with the second quarter (growth 4.6%) US GDP growth was the strongest in more than a decade.

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Strong growth, and more importantly, a solid increase in the number of jobs kept the Fed on track. QE was officially ended in October. The first rate hike was pulled forward a bit and is now expected to happen somewhere in the third quarter of 2015.

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So, again we have to manage without the comforting arms of the Fed. We are on our own. Well apart from the Bank of Japan, of course. The last two times we had to do without US QE, stocks struggled a while.

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Perhaps a surprise of lesser importance, but US consumer confidence reached a seven year high in October. That’s pretty impressive. Unfortunately, house price growth is weakening, which could hamper confidence going forward.

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That said; consumer confidence is rising globally. If we take a look at the consumer confidence in the G7 countries it shows a clear upward trend.

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Let’s move on with the central bank surprise show. In Brazil the short term rate was raised earlier than expected. Inflation expectations are increasing, once more, and a ‘better safe than sorry approach’ seems plausible.

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And what to think of Russia? The short-rate was raised by 1.5% in one go, a full percent more than expected.

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Its goal? To prevent the ruble from falling even further. Was it a success? Nope! The ruble increased the pace of its depreciation right after the announcement was made.

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That leaves Europe. No signs of new surprises here, yet. But that could change eventually as more and more calculations show the ECB will have a challenging, if not impossible, task to reach that desired EUR 1 trillion of balance sheet expansion. For now, the ECB is way behind.

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Meanwhile, the struggle within Europe continues. While the ECB stress test did not offer many surprises, it did emphasize Italy has some serious banking issues. Markets reacted negative as Italian banks got crushed.

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Italian banks were not alone. Gold dived and its price fell back to the lows of 2010. The prospect of a stronger US dollar does not bode well either.

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This is the end of this Week End Blog. Today is Halloween, traditionally the start of the best period for equities. To celebrate markets already skyrocketed thanks to the Bank of Japan. Sayonara! Enjoy your weekend.

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