No stock shock as central bank holdings keep ballooning

Combined balance sheets of U.S., Japan and euro area likely to swell another 20%

Jul 17, 2014 @ 9:49 am

By Bloomberg News

For all the talk of central bankers hitting the brakes, their policies will keep inflating their balance sheets — sustaining support for global equities.

As the Federal Reserve prepares to end its third round of bond-buying as soon as October, the combined accounts of the central banks in the U.S., Japan and euro area could still swell another 20 percent in dollar terms by the end of 2015, according to Cornerstone Macro LP, an investment research company.

That should negate concerns among investors that the end of the Fed's quantitative easing will roil financial markets.

“The flow of global liquidity is nowhere near a stopping point,” Cornerstone economists including Roberto Perli, a former Fed official, said in a July 15 report. “If investors want to look for reasons why stocks should roll over soon, they should look elsewhere — global central bank policies are unlikely to be the culprit.”

Expanding balance sheets has become a pivotal tool of monetary policy since the 2008 financial crisis, as policy makers bought assets and lent cash to banks to fight the subsequent recession and speed recovery.

The Fed alone now holds more than $4 trillion of assets such as Treasuries. The balance sheets of the big three central banks have swelled to the equivalent of about 12.5 percent of global gross domestic product from about 6 percent in 2007, according to Cornerstone's estimates. The 20 percent growth in the next 18 months would push that proportion to 14.5 percent.

Fed Plans

Even as Fed ceases buying bonds it is unlikely to start paring its balance sheet for about 18 months.

One reason is it's planning to reinvest the proceeds of maturing securities and will likely do so until after the first interest-rate increase, said Cornerstone, which assumes a June rise. Fed officials also have suggested they will be slow to sell their bonds for fear of undermining the economy by boosting long-term interest rates.

Meantime, the European Central Bank's balance sheet of 2 trillion euros should increase as it looks to extend as much as 1 trillion euros in fresh lending to banks. It also may start buying asset-backed securities and could go even further by conducting quantitative easing for the first time if deflation threatens.

As for the Bank of Japan, its continued bond-buying is enough to lift its balance sheet to 70 percent of GDP from 53 percent in Cornerstone's view. Like the Fed, the BOJ may keep its balance sheet large even after hitting its inflation goal.

“The expansion of the ECB's and BOJ's balance sheets will more than make up for the stagnation of the Fed's balance sheet,” said Perli and colleagues. “That should alleviate concerns of those who fear the end of QE would bring about a reversal in U.S. and global markets.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Children of AI, and when they are coming to financial advice

Technology reporter Ryan Neal talks about the tremendous progress in artificial intelligence in other industries, and how its applications are slowly making headway in the advice sector.

Latest news & opinion

SEC advice rule hearing updates

Commission says a lot of work ahead, public will have 90 days to comment.

SEC advice proposal unveiling: Here's what to expect

Chairman Jay Clayton will initiate momentous action Wednesday, as the commission meets to debate a rule on broker and adviser standards.

How active are the largest actively managed funds?

Active-share measures for the 15 largest actively traded mutual funds.

Morgan Stanley's success looks long in the tooth to analyst

Sanford C. Bernstein & Co. analyst Christian Bolu, concerned over stalled adviser growth and what it means for lending and deposit growth, believes the stock will "under perform."

Retirement coverage gap, 401(k) rollovers are big emerging threats for plan advisers

Proliferation of state retirement programs approaching the 'tipping point' where it will lead the federal government to step in.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print