CentralBanks,equitymarketsandhopeofhardscience

It will be a busy week for the market watchers as many central banks will come up with rate decisions. Notable amongst them will be Bank of Japan, Bank of Canada and European Central Bank.

The BOJ’s two day meeting will start on Tuesday and deliver a decision on Wednesday. As the economy is expected to decline by more than 6%  this year, the analysts expect the rate to remain at -0.10% levels with main support coming from the BOJ’s open ended QE program. The Bank of Canada is also expected to hold the status quo on the rates at 0.25% and take a call on the 200 bn $ QE program which was announced previously. For the Canadian economy, the last few data points like EXIM data and employment numbers have been better than expected which will give the central bank some confidence. On the ECB side, rates are also not expected to be touched and the main piece of interest will be the outlook assessment which the ECB presents. The ECB had announced a 600 bn Euro package in its last policy on top of the 750 bn Euro package which was announced in May.

In total the central banks across the world appear to be in the same boat where the rates have been slashed to bare minimum and central banks are actively pursuing the asset purchases either of the government or of the corporate sector. The purchases provide the liquidity in the system and also support to the private sector which is in dire stress. But as we know, economics is not a hard science and it is not always possible to predict the outcome of actions of one entity on another, unlike physics where the wise men of yore were able to sort out their theories and mechanics to the decimal point. The only close empirical evidence which the policy makers have is from Japan where the experiment of low rates and QE has been in progress since the 1990s. The results of the experiment have been sober to put it mildly. But then a lot of context pertinent reasons like the old demographics of Japan, high savings rate or an inert society have been devised by the economists to justify the results. If that is true then every country will experience the outcomes which will be uniquely contextual to itself and hence the binary terms like success and failure will hardly do justice to the outcome.

The moot point is that the equity markets around the world are happy with the current approach. The Dow Jones closed in green on Friday and the futures are up in the trading today. The Hang Seng, Nikkei and Shanghai Composite all are clocking gains in the trade today. US Treasury Secretary Steven Mnuchin announced on Friday that Congress and the White House will aim to craft another coronavirus relief bill before the end of the month. The only debate possibly will be on the size of the package and any restrictions in terms of who can avail themselves of the benefits. Republicans are of the view that extremely generous unemployment benefit terms have been a factor which have stopped some people from joining back. The record high number of new cases especially in Florida seem to have had no effect on the market mood as of now.

Domestically, the Rupee opens around 75.15 levels and the 10 year benchmark bond at 5.78 levels. On Friday the G Sec auctions witnessed strong cutoffs despite the exercise of greenshoe options in the longer tenor bonds. The 10 year bond closed at 5.76 on Friday. RBI Chief speaking at a conclave on Saturday stressed that the economic impact of pandemic can result in higher NPAs and capital erosion for banks for which they should be prepare in earnest by raising more capital.