Published May 25, 2021
We're running into the ‘Cold-War’ phase of the cycle - and the relationship between markets and liquidity is heading in an unexpected direction.
Globally, central banks have started to hint towards a reduction in stimulus. The US Federal Reserve mentioned the word ‘tapering' in the minutes from its April meeting. ANZ Research expects more tapering commentary around July and August.
In Australia, we think the Reserve Bank will step back a bit from some of its easing. The Bank of England is likely to rethink some of its quantitative easing programs as well. In 2021, we're likely to get a bit warmer with New Zealand actually raising interest rates, and perhaps South Korea as well.
I think markets are already starting to respond to the un-easing of liquidity we've seen after this particular COVID-19 crisis. And I think the relationship between markets and liquidity is going to be very different this time than it was during the last cycle.
The reality is, central banks around the world are just less dependent on financial markets to drive economic stimulus. There's a couple of reasons for that.
One is the fiscal support has been so significant it really stands apart from the last cycle. Fiscal policy delivers easing directly into the economy. It doesn't need to work through asset prices.
And the second issue is one of the key reasons this recovery has been so abrupt, so compressed, is because it was a response to an almost ‘artificial’ shutdown in the first quarter of 2020, where most countries actually restricted economic activity.
There are unique circumstances this cycle in the way central banks are behaving towards inflation. Many are saying they want to tighten later. They want to see inflation actually within a target band before they start to move.
That implies when they are comfortable on the inflation story, they're going to have an end objective in mind, in terms of tightening.
The bottom line from all of this is if you're looking at volatility in risky assets (like cryptocurrency, for instance) and expecting central banks to ease up to provide markets some support, I don't think you're going to get it.
This cycle is different. Central banks are just much-less reliant on risky asset prices to help drive easing. Markets are going to have to stand on their own two feet.
Richard Yetsenga is Chief Economist at ANZ
Real-time payment networks are not without their challenges. But astute businesses are applying the technology in ways that make a big difference.
This publication is published by Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (“ANZBGL”) in Australia. This publication is intended as thought-leadership material. It is not published with the intention of providing any direct or indirect recommendations relating to any financial product, asset class or trading strategy. The information in this publication is not intended to influence any person to make a decision in relation to a financial product or class of financial products. It is general in nature and does not take account of the circumstances of any individual or class of individuals. Nothing in this publication constitutes a recommendation, solicitation or offer by ANZBGL or its branches or subsidiaries (collectively “ANZ”) to you to acquire a product or service, or an offer by ANZ to provide you with other products or services. All information contained in this publication is based on information available at the time of publication. While this publication has been prepared in good faith, no representation, warranty, assurance or undertaking is or will be made, and no responsibility or liability is or will be accepted by ANZ in relation to the accuracy or completeness of this publication or the use of information contained in this publication. ANZ does not provide any financial, investment, legal or taxation advice in connection with this publication.