The autumn period coincided with the gradual introduction by the main central banks of the fourth phase of credit monetization, QE, in the decade following the 2008 crisis. The prodromes of this action had already been perceived at the beginning of the year as the FED had to react to the strong negative signal of the stock market at the end of the year, deciding to interrupt the credit restriction phase initiated in 2016. In fact, at the beginning of the summer the US Central Bank had doubts about whether to launch yet another QE, but after what transpired in the US repo market in September; all doubts have dissipated. In practice, for the first time since the first few months of 2013, the overnight rate at the FED desk, on several occasions, spiked to almost 10%, despite a guide rate of 1.5%. This is not so much a sign of an imminent credit market crisis, but rather an indication that the system lacks liquidity to be able to refinance maturing debt positions.

This happens when the US interbank market falls below the trillion-dollar threshold, which is equivalent to a level of reserves in excess of the banking system of 1.5 trillion dollars. The decision by the FED to initiate monthly repurchases of securities for 60 billion per month until mid-2020, appears to be functional in restoring an adequate level of liquidity in the system, increasing the balance sheet by about 650 billion, bringing it back over quota 4 trillion. This observation is of particular importance, as central banks do not delude themselves that QE measures can restart the economy, but instead they are concerned with the functional capacity of their respective credit systems, as their institutional role requires.

The ECB has just confirmed a similar measure, while the PBOC, after a period of credit restriction between October 2018 and May of this year, is considering a similar decision, favored by a forthcoming compromise trade agreement with the US. Therefore, the dynamic perspective of the markets should follow that already observed when the previous QE was launched, with the long-term bond segment being disadvantaged as the introduction of new liquidity diminishes the perception of risk by investors making them inclined to move away from fixed income instruments thereby increasing exposure to stocks. Quantifying, the yield on ten-year US Treasury securities could rise close to 2.5%. After a moment of uncertainty linked to the worsening of the fixed income, the international stock markets, especially those of developed economies, will be able to count on a positive underlying trend, supported by the access of liquidity not utilized by the real economy, given its low level of growth. The stock market should see a rebound of undervalued shares based on their respective fundamentals after a decade that has seen growth stocks, such as technology, stand out.

Nicola Bravetti Data Source: Bloomberg

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