The Fed will at some point pull back on its bond purchases signalling the beginning of the end of its quantitative easing, or so goes the theory. But it is already sparking the moribund US dollar back to life, pulling the Australian dollar down despite the continuing high yield gap.
The rush into risk assets appears to be accelerating, supporting equity markets and providing companies with the means of raising capital.
The two markets with the most amount of quantitative easing are apparent from the following chart:
China, of course, sits conspicuously at the other end of the scale as it seeks to rein in an unsustainable rate of economic growth to more acceptable levels around 7.5% per annum.
Commodity prices have reflected that shift as China attempts to change the mix of its growth from export-led to greater domestic consumption.
Although we haven’t included any European indices in the chart, the major European countries of Germany, France and Italy have all recorded gains so far this year despite the recessions being endured across much of the region.
Across Europe, it is becoming abundantly clear that fiscal austerity has bitten too hard and is preventing any economic recovery of substance to occur.
But it is far from clear if the US Federal Reserve is happy with the level of the recovery in the US economy either. Further insight will emerge Saturday week in the chairman’s next speech but we doubt if Mr Bernanke will satisfy the dollar bulls with any hint of anti-QE rhetoric.
The US federal budget deficit is clearly already shrinking after four straight years of $1 trillion-plus deficits. Yet government debt will remain unusually high near 70% of GDP for some time to come.
What do we draw from this for Australian investors?
It is not clear that the US dollar will improve substantially although an upward direction now seems apparent. The Australian dollar is therefore likely to bob around parity for a while.
China’s growth rate is not in peril and at some point support for commodity prices must eventually translate into support for Australian resource companies. China remains the world’s largest consumer of most major commodities.