The ECB left interest rates unchanged, and maintained their bond purchase program at its monthly meeting, as anticipated. At the post announcement press conference, in which, over the past few years, the focus has often been on what further measures the ECB would use to stimulate the euro area economy. Today’s press meeting almost questioned the possibility as to whether the ECB could reduce some of the current stimulus measures. This is post December’s jump in the euro area inflation rate from 0.6%, year on year to 1.1%, alongside some recent stronger economic data.
So far equities seem to be taking the probability that the next move from central bankers will be to tighten monetary policy fairly well. This is probably partly as interest rates have a long way to go around the globe before they come close to being anywhere near “normal”. The fact that the world’s central bankers are moving away from thinking of new ways to stimulate the global economy must also be a good sign.
It is always of some interest to understand what professional fund managers consider is the greatest risk to the global economy, as you can likely rule it out as the probable cause. The January Merrill Lynch survey now has trade wars alongside a US FED policy mistake as the highest risk to equities in the coming months. The result of the December poll this possibility was not considered a risk at all. What did fund managers fear the most in the December survey? A Stagflation led collapse in bond prices, and the possibility of the break-up of the EU. They now believe these risks are much reduced.
We did talk at the start of the year as to whether we were entering the euphoria stage of the bull market. If fund managers cash levels are any indication, we may be still be away from that, however the signals are mixed. Towards the end of last year cash held as a proportion of the fund managers on average fell, the January survey has seen a reversal as fund managers have once again increased cash. On the flip side, they have also increased their weightings to equities above the historical mean and reduced it to bonds. The AAII retail sentiment survey this week fell back below its historical average. Hopefully euphoria is for another day.