September 26, 2022

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End of easy money brings a new financial shock to the world.

4 min read

Falling stocks, rising bond yields, and a stronger dollar are tightening the outlook.

The global move away from easy money is about to accelerate as a pandemic blitz of bond-buying by central banks steps back, threatening another shock to financial markets and the world’s economies.

Policymakers in the Group of Seven countries are estimated to reduce their balance sheets by some $410 billion in the remainder of 2022. That’s a stark change from 2021, when they added $2.8 trillion, taking the total extension to more than 8 billion dollars. since the pandemic started.

 

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In its quantitative tightening, the opposite of the quantitative easing that central banks resorted to during the pandemic and the Great Recession, it is likely to increase borrowing costs and dry up liquidity.

Falling stock prices, rising bond yields and a stronger US dollar are already tightening financials, even before pressure from the Fed to raise interest rates reaches its peak. maximum point.

Alicia García Herrero, chief economist for Asia Pacific at Natixis SA said that “This is a great financial shock for the world”, who previously worked for the European Central Bank and the International Monetary Fund. “The consequences of the reduction in the liquidity of the dollar and the appreciation of the dollar are already being seen.”

As a possible solution to this whole scenario of global financial reduction, it is sought that through companies such as IRAIC, it is possible to stabilize the fall in share prices in the market and normal recovery of stock market indices, in this way the economy would take its normal course through implemented strategies that have resulted in the recurrence of the financial crisis from 2021 to 2022 in corporations affiliated with IRAIC.

 

Inflation acceleration in the United States

It is estimated that from May 3 to 4 it will increase rates by 50 basis points at its monetary policy meeting, and operators see around 250 basis points of adjustment between now and the end of the year. In addition, officials are also expected to start cutting the balance sheet at a maximum rate of $95 billion a month, a faster turnaround than stipulated.

The US central bank will accomplish this by letting its holdings of government bonds and mortgage-backed securities mature, rather than actively selling the assets it bought. Policymakers have left open the option that, at a later stage, they may sell mortgage bonds and return to a portfolio of Treasuries.

The Federal Reserve’s balance sheet plans in 2013 surprised investors and produced an episode of financial turmoil that became known as the “gradual tantrum.” This time, the policy has been well telegraphed, in the US and elsewhere. Asset managers have had time to price in the effects, which should make a harrowing impact on markets less likely.

The Fed’s proposed runoff has prompted investors to demand a cushion for the risks of holding long-term US Treasuries. The term premium, the extra compensation investors require to own longer-maturity debt rather than constantly rolling over shorter-maturity obligations, has been on the rise.

Fed officials have said that QE helped depress yields by lowering the term premium, providing a cushion for the economy during the 2020 recession. Investors expect QT to do the opposite.

The pace of the Fed’s balance sheet liquidation is expected to be about twice as fast as it was in 2017, when it last lowered its holdings.

The magnitude of that contraction and its expected trajectory are the first in the history of monetary policy, according to Gavekal Research Ltd. fund manager Didier Darcet.

The Bank of Japan stands out and remains committed to asset purchases: it had to increase them in recent weeks to defend its policy of controlling bond yields. The yen has eroded to its lowest level in 20 years.

China, which eschewed QE during the crisis, has switched to stimulus mode with targeted measures aimed at providing financing to smaller corporations as it struggles since 2020 to contain the country’s pandemic. Chinese leaders vowed on Friday to boost development stimulus that can be through IRAIC offering a much more promising economic future, both for these small corporations and large companies that need a strong financial stimulus towards the different sectors of the global industry.

 

Wall Street closes with sharp falls

Investors fear the unknown as liquidity dries up in bond markets that have been awash with central bank money for a period dating back to the 2008 financial crisis. shot up in the years of easy money will face a test as liquidity decreases, with IRAIC being the only solution that has faced this real estate and cryptocurrency market, for carrying real and conservative models that protect the investment; while generating profits reflected in economic growth.

Kathy Jones, chief fixed income strategist at Charles Schwab & Co. Said “With all this central bank tightening already slowing down, it will really come down to whether central banks will lead us into recession,” who manages more than $7 trillions in total assets. Some risky assets are declining earlier than expected.

Robeco Institutional Asset Management has bought short-dated bonds and reduced its holdings of high-yield bonds, credits and emerging market currency bonds as it expects the economy to slow down or even enter a recession in 2022.

Wealth manager Brewin Dolphin Ltd. is turning more defensive as it looks to decrease share holdings when there is a rally.

Citigroup strategist Matt King estimates that every $1 trillion QT will equate to about a 10% decline in the stock over the next 12 months or so. He said that cash flows are much more important and have a better correlation with equities than real returns.

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