Weber warns Markets Unprepared for Central Bank Shifts.
Investors are dangerously unprepared for a sharp rise in eurozone bond yields when US interest rates march higher and European quantitative easing ends, Axel Weber, chairman of UBS and the former head of the Bundesbank, has warned.
The jump in US rates could spark big jolts in the markets as the long spell of aggressive monetary easing across the globe has left many investors off-guard over a swing in the global rate cycle, he added.
“I don’t think we will have increasing divergence among the major central banks in the world for much longer,” Mr Weber said, predicting that Europe would follow the US with a rate rise by next September at the latest. “I think the ECB is closer to slowing its current quantitative easing programme than many in the market expect.”
Until now, the eurozone has not seen a similar swing in rates as short-term rates have stayed low — or even negative in some markets — while the ECB has been engaged in aggressive QE, including extensive bond purchases.
But Mr Weber predicted that the ECB would end its bond purchases sooner than many investors had assumed, sending the eurozone yield curve higher. “A large part of the market is uni-directionally positioned and it is positioned in a direction where you will have to take off some of those positions over the course of 2017,” he said.
Mr Weber also voiced support for Mr Trump’s plans to move away from only monetary stimulus toward more structural measures and fiscal stimulus, such as large-scale infrastructure projects. He aired concern that US companies with international operations could be negatively affected by the president-elect’s plans to alter trade agreements.
“Markets know how to price and discount market risk,” he said. “Markets are much less good at pricing political uncertainty . . . Our broad presence in continental Europe gives us optionality in case we need to move employees from London to onshore locations. Optionality is going to be the name of the game.”
I will not be shocked if the ECB tapers QE. It isn’t doing Europe a bit of good.
As for hikes, I doubt it, unless the ECB is forced to hike in response to a euro plunging out of control, possibly in response to Italy leaving the eurozone. It seems a bit early for that scenario, but Italy is likely to exit the Eurozone in due time causing all sorts of havoc.
Everyone seems to have bought into the idea that a big round of inflation is coming shortly. I think a deflationary asset-bubble bust is more likely, with central banks having to reverse hikes (assuming they get hikes in the first place).
Mike “Mish” Shedlock