Investors looking to central banks to counter bad news with QE
The European Central Bank last week signalled more quantitative easing (QE) or bond-buying from December. The Bank of Japan will hold a policy board meeting on this Friday amid growing speculation over whether it will surprise markets with additional credit easing, just as it did a year ago. Meanwhile the Federal Reserve may put off its first interest rate rise since 2006 until 2016.
The Wall Street Journal reported on Monday that profit and revenue are falling in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter, according to Thomson Reuters.
Sales are on pace to fall 4% — the third straight quarterly decline. The last time sales and profits fell in the same quarter was in the third period of 2009.
The S&P Global Markets Intelligence (GMI) says the preliminary outlook isn't all that encouraging mainly because of severe earnings weakness in the energy (-66.0%) and materials (-19.0%) sectors, S&P 500 earnings are expected to decline by 5.1% versus third-quarter 2014.
It says 3 of 10 sectors are expected to grow third-quarter earnings by low single digits, consumer staples earnings are expected to decline by 2.3%, and technology is essentially flat (+0.1%). This leaves only the health care (+7.4%),
telecommunication services (+9.1%), and consumer discretionary (+11.8%) sectors poised to report reasonably constructive news. "These overall dismal earnings expectations are founded on nearly as disappointing expectations for a 1.5% decline in third-quarter revenue growth."
GMI says "We believe the relatively healthy prospects currently characterizing a single sector, consumer discretionary, summarizes why investors so far have refused to cede their collective optimism for the equity market."
In August, markets thought the Chinese dragon had been slain by bears. The story moved on and perceptions of the dragon’s health improved, but the FT’s James Mackintosh says investors are again hoping central bank wizardry will help prices — see video below.
In an interview with Ben Bernanke, former Fed chairman, Martin Wolf of the FT raised the idea that if the central banks are going to expand their balance sheets so much, it would be more effective just to hand the money directly over to the people rather than operate via asset markets?
Having gained the nickname “Helicopter Ben” for suggesting just such a policy, he is very much aware of this idea. But he responds by saying, “Well, it doesn’t have to be put in such an off-putting form. I think a combination of tax cuts and quantitative easing is very close to being the same thing.” This is theoretically correct, provided the QE is deemed permanent.
Central banks that maintain ultra-low interest rates risk igniting asset bubbles and make it more difficult to respond to the next financial crisis, a comprehensive report on the monetary policy has warned.
Written by four macroeconomists including Sir Charles Bean, former deputy governor of the Bank of England, the 17th CEPR-ICMB Geneva Report on the World Economy, “Low for Long? Causes and Consequences of Persistently Low Interest Rates,”suggests that real interest rates will eventually return to more normal levels, but in the meantime deflationary traps are more likely, as are financial boom-bust cycles (see chart below).