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G-20 Post Mortem: Hopes, Fears, & Dashed Exepctations

We, like Bloomberg's Richard Breslow, were bemused this weekend by the communiques from the wisest men in the room at the G-20 meeting. On one side of their mouths they warned of "excessive risk-taking," in markets noting that there were "mounting economic risks" also. On the other hand, stories continue to print of US equity strength implying optimism over global growth - despite the ongoing collapse in consensus GDP expectations. However, away from this hope and fear, it was the almost coordinated responses of the PBOC (Chinese Finmin Lou Jiwei signaling not to get carried away with stimulus expectations), ECB (Visco saying may not need additional QE step since EUR had dropped 'enough'), and finally the BOJ (Iwata saying Abenomics misunderstood, USDJPY 90-100 'fair); all dashing market expectations of a smooth hand over from a feckless Fed to a free-printing rest-of-the-world. Stocks (and carry) responded by selling off.

 

As Bloomberg's Richard Breslow notes,

I was amused/bemused this weekend when I saw two stories literally next to each other on my newsfeed.

 

FEARS - The first said “global finance chiefs said to warn of mounting economic risks.”

 

HOPE - The next story, same dateline: U.S. stocks increase for week over optimism on economic growth.

 

 

 

Unfortunately, that’s the sort of talking out of both sides of their mouths that’s done whenever it suits them, so we need to be careful of the shelf life of these commentaries, who is speaking in what venue and what is the sound bite meant to satisfy.

 

G-20, we talked at end of last wk on how the G-20 mtg was an opportunity to do something special, but what came out of it was the French and Germans telling everyone to chill, while the Italians said the TLTRO takeup means nothing until we see what happens in December.

 

The overall conclusion was that the ministers agree on many goals, with little agreement on the means to those ends.

 

DASHED EXPECTATIONS - Probably the most interesting and actionable of the economic comments came from the Chinese Finmin Lou Jiwei, who signaled not to get too carried away with the stimulus China implemented last wk, this isn’t the start of a major ongoing program. That comment is what really got equity mkts to swoon over the weekend and people to be a little bit dour.

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Add to that ECB's warning not to expect QE... (as Bloomberg reports)

The European Central Bank may not need to add stimulus measures after steps in the past three months pushed down the euro, said Governing Council member Ignazio Visco

 

“Inflation expectations have to be back where they were,” Visco said in an interview in Cairns, Australia, where he is attending a meeting of Group of 20 finance chiefs. “This doesn’t mean that there will be a next step. We have been bold enough to reduce interest rates to a level that was unexpected to the market.”

 

The single currency has dropped about 6 percent since early June, when the ECB introduced a negative interest rate on excess reserves and presented a four-year lending program to fuel credit. Policy makers reduced borrowing costs further earlier this month and committed to buying asset-backed securities and covered bonds to boost the ECB’s balance sheet by as much as 1 trillion euros ($1.3 trillion).

 

 

The extent of the exchange rate’s fall is “more or less, given the moves that were done between June and September, the right response,” said Visco, who also heads Italy’s central bank. The ECB isn’t targeting any exchange-rate level, he said.

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And The BOJ's warning not to expect more QQE...

  • *FORMER BOJ DEPUTY GOVERNOR KAZUMASA IWATA SPEAKS IN INTERVIEW
  • *DAMAGE TO JAPAN FROM WEAK YEN MAY OUTWEIGH MERITS: IWATA
  • *WEAK YEN PUTS JAPAN AT RECESSION RISK: EX-BOJ'S IWATA
  • *DOLLAR/YEN AT 90-100 REFLECTS JAPAN FUNDAMENTALS: IWATA
  • *CURRENT YEN WEAKNESS SLIGHTLY EXCESSIVE: IWATA

Are the world's central banks re-co-ordinating on a tightening path as various bodies from the IMF to BIS warn that they have gone too far?

*  *  *

And the markert reacted with risk-off despite the G-20's best efforts to happy-talk the future.