Calls Grow for Central Bank Action as Stocks Swoon
With global stocks continuing their tumble and bond yields dropping in tandem, calls are getting louder for coordinated central bank action to stem panic in markets.
Synchronized monetary easing could happen as early as “even this week,” as central banks of Australia, England, and Europe meet, John Noonan, senior foreign-exchange analyst with Thomson Reuters, told CNBC Asia’s “Squawk Box.”
“The markets are screaming out for coordinated action of some description,” Noonan said. “We are seeing bond yields going in both directions, depending on whether they are safe haven or risk. They are saying we need a response and we need one very, very quickly.”
Investors seeking safety are selling equities and buying bonds, pushing yield on 10-year Japanese government bonds to 0.79 percent on Monday, its lowest level since July 2003. U.S. Treasurys’ yields are also at rock bottom — the benchmark 10-year traded as low as 1.442 percent on Friday, the lowest level in records going back to the early 1800s, following the dismal U.S. jobs data.
Selling in equities accelerated in Asia on Monday; Japan’s Nikkei 225 Index declined 2 percent and Australia’s S&P/ASX 200 Index lost 1.6 percent in early trade, while South Korea’s KOSPI Index fell 2.4 percent, as investors bailed on jitters over a triple whammy impact of a weakening U.S. economy, Europe’s deepening fiscal crisis and a slowing Chinese economy.
According to Michael Gayed, chief investment strategist, Pension Partners, now could be a “do or die” moment for central banks to embark on easing. He said U.S. bond yields, which are at levels “not seen since post-Lehman” days, are indicating that markets are expecting such a move, especially by the U.S. Federal Reserve .
“There has been a tremendous escalation of commitment by fiscal authorities and central banks in an attempt to prevent a complete collapse in the global financial system. Quite frankly, they cannot let it go,” Gayed said. “They’ve already committed so much time, capital, and reputation to prevent the event from happening. So we could see another global ‘shock and awe’ in the monetary system driven by central banks that will simply say, you know what, we have to front-run the possibility of 2008 repeating.”
Bill Evans, global head of economics at Westpac Bank in Sydney, said that the Fed and the People's Bank of China are now under pressure to ease monetary policy or implement stimulus measures after last week’s data.
“It’s clear that the U.S. economy is losing momentum,” he said. “The Fed will embark on a QE3policy. I think the Chinese authorities will get their stimulus right. The single biggest risk is the European situation, how the Europeans deal with that.”
Evans also expects more stimulus from the European Central Bank and the Reserve Bank of Australia (RBA). Australia will likely cut interest rates by 100 basis points “over the next few months,” he said. The RBA meets on Tuesday to discuss monetary policy.
“The domestic (Australian) economy is clearly in need of further stimulus,” Evans said. “Global risks are emerging. With interest rates where they are, there is a lot of scope of further rate cuts.”
Apart from the RBA, the Bank of England and European Central Bank will meet on Wednesday, while Fed chief Ben Bernanke is scheduled to speak before the Senate Committee on Thursday.
—By CNBC’s Jean Chua