Markets were somewhat nonplussed by Mario Draghi’s slightly less than dovish tone as he summarised the latest thinking at the European Central Bank in his last major pronouncement before his departure.
According to Draghi, the issue of whether or not to cut rates wasn’t even discussed at the most recent ECB meeting because the current risk of recession is “pretty low.”
In response, the Euro strengthened, European government bonds made losses and equity markets gave up some ground.
Still, certain signals that action may be taken in September were apparent. ECB wording on forward guidance was altered subtly so that the Governing Council is now vowing to keep rates “at present or lower” levels where formerly it was just at “present” levels.
All of which meant that analysts were somewhat divided as to what the immediate future holds, which in turn was one reason why equity markets were lacklustre.
Will there now be a rate cut in September as most in the market had previously expected? The overall consensus is that there will be, and that there may be some easing to go with it. Not everyone is convinced that the 10 basis point cut which is generally mooted will have much impact, and there is some feeling that further stimulus might be needed too.
Still, the ECB’s reticence on near-term interest rate moves does at least allow the US Federal Reserve space to cut interest rates first which, all economic issues aside, is certainly good politics.
President Donald Trump has long complained that the US is the victim of a constantly escalating currency war while simultaneously voicing his frustration at the Fed’s recent tendency to increase rates while others are cutting or at the very least keeping them on hold.
Although it’s by no means a racing certainty, there is a strong expectation in markets now that the Fed will reverse this policy next week and cut rates by 25 basis points. A minority of Fed-watchers even think the cut will be as large as 50 basis points.
Either way, if there is to be a new round of competitive devaluation globally, the Europeans will be able to say with some justification that the Fed moved first. It’s a subtlety that may not make it into Mr Trump’s Twitter feed, but which may yet have some force around the negotiating table.
Whether or not the rate cuts do come from either or both sides of the Atlantic, what is clear is that the short period of regular rate rises that was initiated a couple of years ago is now over. It’s an unusual situation to have the pressure is all on the downside for rates, even as equity markets continue to power away. But the idea that there is any kind of “normality” which can be made reference to in global economics may now be a thing of the past.
With rates down, equities high and stimulus once again on the cards, it’s getting hard to know if real value is being created in any meaningful way, or if the financial apparatchiks that run the global system are increasingly engaged in a smoke and mirrors operation to convince electorates that such thing as growth is really possible.
In this context - where rates in Europe are at less than zero and the US President is on a very public campaign to weaken his own currency - it’s not surprising that alternative stores of value are once again finding favour.
There’s gold, which is still trading at comfortably above US$1,400, not far off six year highs. There’s silver, which has had a run too, recently. And then there are the crypto currencies. Facebook has for now been stymied in its efforts to launch Libra.
But how long will it be before Facebook, or an entity like it, and not necessarily American, manages to launch something similar? Whether it will seriously be able to challenge the dollar remains an open question. But with the dollar constantly being undermined from within, it’s one worth asking.
After all, if a global crypto currency does ever get off the ground it could strike at the heart of US global financial hegemony.