Turning Points: Shifting Central Banks, Fading Growth, and Falling Oil Prices

Just as the US Federal Reserve stopped printing US dollars, the Bank of Japan (BOJ) announced that it would amplify its previous money printing, now taking it to a full 15% of GDP. In addition, the European Central Bank (ECB) has adopted a significantly more aggressive position and suggested that it will step up efforts to monetize Eurozone bonds.

All this is happening at a time when global growth appears to be slowing, so it is not at all clear that lower currencies in Japan and the European Union will lead to greater exports.

In addition, oil prices have fallen sharply in the past two months — from the low $100s per barrel to the low $80s. Even the Saudis have announced that they are comfortable with lower prices. Against the backdrop of spiking US oil production, it seems that the status quo has changed. In fact, the central message encoded in last month's news is that the status quo has changed. We are shifting from the post-crisis recovery to late cycle growth. Only now there is greater concern about large pockets of low-quality debt (high-yield bonds, sub-prime auto loans, etc.) and the decreased ability of central banks to deal with these problems.

Here's a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

• "US Dollar Surge Is Set to Hurt Weak Economies" (Sydney Morning Herald)
• "Euro to Fall Below Parity with the Dollar by 2017" (Reuters)
• "US Dollar Approaches Four-Year High after Fed" (MarketWatch)

Commodities

• "China Copper Ore Imports Jump to Record as Smelters Boost Demand " (Bloomberg)
• "Chile Maintains 2014, 2015 Copper Price Forecast" (Kitco News)
• "Data Pointing to Sagging China Demand Send Iron Ore Prices Tumbling" (Financial Times)

China’s Direction

• "Falling Bank Deposits Add to Warning Signs on Economy" (Bloomberg)
• "The Case for and against China" (Bloomberg)
• "Beware a Chinese Slowdown" (The Guardian)

Credit Markets

• "Drifting Apart: The Decoupling of USD and EUR Credit Spreads" (Bond Vigilantes)
• "Why Corporate Bond Yields Could Fall Even Further" (Barron's)
• "Traders Wipe $1 Trillion from CDS Balances" (Businessweek)

Derivatives

• "Retail Investors Flock to Derivatives for Income and Safety" (The Street)
• Banks change rules governing derivatives market — agree to give up right to close out deals when counterparty is failing. (Reuters)
• Bond derivatives explode as liquidity deteriorates. (Bloomberg)

Energy

• "Fuel-Subsidy Cuts Threaten Energy Demand in Asia" (Wall Street Journal)
• "IEA Sees Oil Demand Growth Much Lower, Hitting Prices" (Reuters)

Euro Crisis

• "Fund Managers Don’t See Return of the Euro Crisis" (Wall Street Journal)
• "Portugal Doesn't Mean Euro Zone Crisis . . . Yet" (CNBC)
• "Europe and the End of the Euro Crisis" (Forbes)
• "Why the Euro Crisis Still Isn’t Over, in One Chart" (Washington Post)

Hedge Fund Money

• "Billionaire Ray Dalio's Hedge Fund Sues Ex-Employees over New Fund" (Forbes)
• "Billionaire Einhorn's Greenlight Capital Plans to Raise Money for First Time in Two Years" (Reuters)
• "Three Bets Going Sour on Buffett" (Reuters)

Interest Rates and Central Banks

• "There's a Good Chance Interest Rates Won't Be Raised at All" (Forbes)
• "ECB Officials Call for Bold Measures" (Wall Street Journal)
• "China Tries Again to Jolt Tired Economy" (Wall Street Journal)

Japanese Debt and Inflation

• "Japan Central Bank Shocks Markets with More Easing as Inflation Slows" (Reuters)
• "Is Japan's Economy on the Verge of a Recession?" (Wall Street Journal)
• "Central Bank Moves Drive Market, Dollar at New Highs vs Yen, Euro" (Reuters)

Stock Market

• "How the Stock Market Falls in a Growing Economy" (Forbes)
• "Warren Buffett's 'Single Best Measure' of Stock Market Value Is Higher Today Than It Was During the Credit Bubble" (Business Insider)

Follow the Bubble

• "Icahn: 'Quite Concerned That Something Is Going to Happen' with the Stock Market" (CNBC)
• "Bubble or No Bubble? Six CBRE Real Estate Forecast Takeaways" (Silicon Valley Business Journal)

Time Capsule

During World War I, the Fed Reserve worked behind the scenes to finance France and Great Britain. In effect, the United States paid for their war munitions via an inflation of the currency paid by US citizens. This article is a quick but fascinating read on monetary history during World War I.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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