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Divergence in monetary policy creates unusual state of affairs


ETF Securities Research and Roubini Global Economics’ latest quarterly survey finds a new operating environment for all asset classes, driven by steep declines in interest rates, down to zero or below in several instances.

The report finds that there are actual or expected easing of rates across 20 countries, just as the Fed and maybe even the Bank of England prepares to hike its rates. Meanwhile, last quarter saw pessimism about global growth worsen: “Our views are more upbeat as Europe and Asia benefit from low oil, low rates and weaker FX. We have ratcheted up our forecasts for Europe, where we expect a mild cyclical recovery to persist for a few quarters (thanks to monetary stimulus and a bit of good luck), and Asia too is experiencing a growth acceleration, in China’s Year of the Sheep. The U.S. has had a sluggish start to the year, but is still experiencing a tightening of labour-market conditions” the report says.
There is significant divergence in monetary policy as the Federal Reserve and the Bank of England is preparing for its rate-hiking cycle, even as central banks in Europe and elsewhere cut their policy rates, sometimes into negative territory. The survey says: “We are seeing a growth improvement in Europe (closer to potential) on low rates and low oil prices, but fiscal support and structural reforms are needed to make the recovery more substantial, while a heavy political calendar could spoil the party.
In Asia, the report describes recovery as ‘sheepish’. “The growth impact of the lower oil prices is not yet fully realized, even if the (dis)inflationary impact was rapid. Asian central banks are easing in an effort to stimulate their economies and improve their terms of trade.”
In terms of commodities, ETF Securities believes that policy stimulus in Europe and Asia in particular is likely to drive demand for commodities higher. “We expect demand for industrial metals and platinum and palladium (which have high industrial usage) to benefit from the stimulus-driven cyclical rebound” the firm says.
“Gold is likely to continue to feel the weight of rising interest rates in the US. However, currently the price of gold over-estimates the pace of that tightening, and gold can offer a relatively cheap hedge against some of the tail risks of policy mistakes that may occur as the rise of anti-establishment political parties in Europe threatens to challenge the status quo.”
Despite seeing uplift in demand from its industrial applications, ETF Securities believes that silver’s close correlation with gold will temper its price gains with excess mine supply continuing to weigh on price.
In terms of the oil price, the firm predicts that the price war will continue to rage on. “While oil rigs in the US are being shut off at an unprecedented rate, oil inventories continue to increase. We expect US crude oil output to fall around June. The major oil benchmarks WTI and Brent could therefore fall further before recovering later in the year.”
The firm remains bearish on natural gas as seasonal demand will drop off in the coming quarter. The beginning of the ‘injection’ season will see the accumulation of inventories which will keep the market well supplied, the report says.
The firm is optimistic for grain prices as lower supply following last year’s near perfect weather conditions has its effect.

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