The ability for the big three central bankers – FOMC, ECB and BOJ to continue with planned divergence requires a heavy dose of gluchwein and maybe something even stronger to get over the hump of the New Year, writes Bob Savage, Track Research.
We call it a festival of lights because it’s dark.
We call it a season of hope because it’s the end of the year. We see anomalies everywhere in life and in the calendar effects that stretch beyond our time-space paradigms.
Relativism thrives in such a world, but it leaves markets more confused. Last week was about central bankers looking into 2018 and their forecasts dominated the path for traders even more than the forward-looking data most of which suggest robust 4Q growth continuing into 1Q 2018 but paradoxically low inflation.
If last week was about continuing a risk-on rally, aided by dovish central bank forecasts, then why did Japanese yen (JPY/USD) gain along with Swiss franc (CHF/USD) and gold? This is the first anomaly.
Then again why is bitcoin (BTC) up 20% on the week while the CBOE Volatility Index (VIX) down 7%? Perhaps that is the second. As for the third, its clear that political success in the UK at managing a EU divorce deal doesn’t solve all of the PM May’s problems, just as a tax reform deal may not settle the future for the Republicans in 2018.
All these questions add to the view that complacency over bubbles will eventually pop as policy shifts and that becomes dependent on inflation.
What we are all celebrating is the year-end and the present circumstance, thus leaving the heavy lifting of worry and doubt for January 2018.
Expect the week ahead to pivot on the only answer to the anomalies about risk – politics – with the focus on the U.S. tax reform passage to law, with the weekend election in Australia, to the Catalan vote Thursday. The contingent reaction of central bankers to political events continues to be critical to trading risk wherever it shows up – witness South Africa and Brazil this week.
The ability for the big three central bankers – FOMC, ECB and BOJ to continue with planned divergence requires a heavy dose of gluchwein and maybe something even stronger to get over the hump of the New Year.
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