Some suggest the most important step will be when the Federal Reserve actively starts withdrawing liquidity in the US – but the turning off of the tap is still a significant moment.
With only one month until the existing injections of liquidity come to an end, it is perhaps a surprise that Ben Bernanke hasn’t already made a formal announcement either way, even if just to say he is weighing up his options. He has committed to nothing more than the bland statement that the Fed “will look at various economic indicators” and then make a decision.
Not much is going to change that dramatically in the next four weeks to make a decision now different to any decision made in late June – there will not, for example, be a glut of jobs created in the US. Reading between the lines suggests further quantitative easing is more than likely.
Listening to Mike Jennings, a senior investment manager for global equities at Premier Asset Management, this could be a positive sign for equity investors. He talks about how throwing money at the economy has so far positively contributed to real assets, commodities, liquid assets (i.e. financial instruments) and equity markets rising.
If, he suggests, QE does finish and QE3 is consigned to the “too difficult” pile equity investors will be in for a rough ride but they may still be better of than some should bonds and physical commodity prices, gold in particular, will start to fall.
Jennings does offer a word of caution though – we have never been here before so who really knows what will happen next?
Ignis Asset Management chief economist Stuart Thomson is sticking to his guns regarding further quantitative easing – in both the US and the UK – saying he can "confidently predict" such a scenario.
The danger is that bringing QE3 into play sends a signal that the central banks are a one-trick pony and many will start to rely on it far too much. At some stage they will have to stand on their own two feet, but for the time being central banks will not want to do anything to rock the boat.
They will do whatever it takes to maintain the positive momentum that monetary easing has created, so while there is such fragile growth (note ‘growth’!) they will carry on injecting money into the economy. The timing itself is less easy to predict. But once we have that confirmed, the false sense of certainty it brings will ultimately provide a fresh headwind for equities.
