A fellow market participant asked me this week for my views on the European Central Bank’s (ECB) monetary policy meeting on Thursday. Instinctively I reached for the catchphrase of Lauren Cooper, the surly schoolgirl of The Catherine Tate Show fame: “Am I bovvered?”
Far greater issues dominate global asset markets at the moment than the desire for more stimulus from the ECB or even China’s slowing growth and troubled relationship with markets; the precipitous decline in oil prices; and the outlook for US interest rates.
The World Economic Forum’s Global Risks Report 2016 suggests the top-ranking global risks are societal, environmental and geopolitical. In its list of the 10 global risks most likely to come to pass, those stemming from economics rank a lowly seven. As many central bankers have been shouting for some time now – the more pressing concerns are beyond the direct influence of interest rates and quantitative easing.
But within the report sits a map outlining connections between global risks. This serves as a reminder of the ‘butterfly effect,’ or law of unintended consequences: there are numerous routes to deflation, unmanageable inflation, asset bubbles and financial crises that appear, at first glance, to have little to do with the economy.
For the time being, the eurozone seems to be in goldilocks situation – neither too hot nor too cold. Consumer confidence is high, the credit channel is beginning to show signs of functioning, unemployment is falling from record highs, the fiscal stance is loosening, and exports, despite emerging market woes, are performing well. Core inflation, which excludes energy and food, actually picked up through the second half of 2015.
Against this backdrop, does the ECB really need to do more, after easing policy again in December? The argument that falling oil prices could send the economy into a deflationary spiral simply does not wash. For the eurozone, oil-price weakness is a positive for consumers and industrial companies over the longer-term.
At the last press conference, it seemed that the influence of Mario Draghi, ECB president, on the board of governors had been diluted somewhat. While the entire board cannot be like Super Mario, we do need reassurance that the other governors stand ready ‘to do whatever it takes’ in the face of any shocks and white-swan events. Without this, there is room for the euro to rally further and sovereign bond yields to rise – undoing much of the improvement in financial conditions seen throughout 2015. To that effect, this bond manager is very bovvered.
Hinesh Patel is fixed-income portfolio manager at Old Mutual Global Investors.