Financial markets under the spell of expansionary monetary policy

Asset markets around the globe have factored in protracted monetary expansion. Despite the occasional bout of jitters, equity markets on the whole are looking robust and many are flirting with multi-year highs. Given the weak economic indicators seen in recent weeks, this is remarkable. The pickup in the economy expected by many observers for the rest of the year is evident neither in Europe nor in the world economy. We have recently revised our GDP forecasts, now showing world growth of only 2.5 % and even a slightly negative average growth figure in the eurozone for 2013. For financial markets this is more evidence that monetary accommodation is here to stay for the foreseeable future.

High equity and bond prices reflect ultra-low interest rates and the central bank liquidity splurge. The low interest rate policy has just been confirmed by the ECB, with a key rate cut of 25bp to 0.5%. The main reasons for this decision are the latest economic data showing no spring pickup, an inflation rate of 1.2% at present which will probably considerably undershoot the ECB goal this year and next, and modest growth rates in private monetary holdings despite the liquidity flood (see chart below). The overall impact of the ECB move on EMU growth will, however, be fairly muted. This follows the recent announcement by the Bank of Japan that it plans to double the monetary base by the end of 2014. If in future the Japanese central bank is going to be snapping up some two-thirds of government bond issues, close to zero interest rates on Japanese government bonds are practically guaranteed. Given the size of the Japanese bond market, this will also serve to lower global yields. 


Dr. Michael Heise

Allianz SE
Phone +49.89.3800-16143

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