What is the single biggest risk facing global markets in 2018? According to Deutsche Bank’s chief international economist the biggest risk is the end of European quantitative easing.
The FT has a feature on the potentially profound impact that the end of central bank support will have on bond markets.
The coming year promises to be an inflection point for central banks. The Fed has started reducing the pile of the bonds it acquired after the financial crisis — a process that will accelerate. The ECB started to trim its QE programme in 2017 and is expected to end it altogether in 2018. Even the BoJ is expected to raise its bond yield target slightly next year.
While markets thus far appear sanguine about the prospects, investors are eyeing the possible effects with rising trepidation. While it has not done it single-handedly, central bank support has been instrumental in levitating markets higher since the financial crisis.
“The coming changes in global monetary policy is nowhere near priced in and is actually grossly underestimated,” says Robert Michele, chief investment officer of JPMorgan Asset Management.
US bank Wells Fargo estimates that central banks have absorbed more than all the bonds issued by G10 governments over the past two years but next year they will only buy 40 per cent of overall debt issuance.
Jeremy Jones, CFA
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