Central banks could be lining up synchronised shock and awe for September
The conditions seem set for a round of globally coordinated monetary action by the world's leading central banks. This could give risk assets a real fillip for a while and certainly boost the value of the Australian dollar, sterling, the Euro, gold and silver versus the US dollar were this to happen.
There are signs across the world that economies are either slowing or are stuck in recession and with November elections in the US, changing of the guard in China at year end and ongoing disagreement in the Eurozone over saving the Euro – the baton has pretty much been passed to the central banks to try and stop the global situation deteriorating.
There's certainly been a lot of talk from some of the leading central banks, which the markets have interpreted as signalling more intervention. But at some point it is going to have to be a case of 'a little less conversation and a little more action' to paraphrase Elvis Presley.
And globally coordinated would be far more effective in lifting sentiment than each central bank doing its bit in its own time. Remember some time back the Chinese, Eurozone and UK central banks taking uncoordinated action in the same week without the participation of the US Federal Reserve had only a momentary impact on the markets.
Therefore better together - so what may they be waiting for?
The European Central Bank has hinted that it wants to support peripheral Eurozone sovereign bonds, which would go a long way to restoring confidence. But it has to negotiate with Eurozone leaders a road map for doing this. Another factor might be the markets themselves – they're pricing in the expectation of monetary action. Merely confirming those expectations may therefore have a more muted impact. Stepping in with a display of synchronised shock and awe during plunging markets could have a far more dramatic impact in terms of sparking big rallies as the short sellers of risk assets would get badly burned thereby amplifying upward price action as they covered their positions.
For the central banks therefore September onwards might would be better than August. By then it's possible the ECB may have found a way to fully participate, the European summer holidays will be over and markets may be starting to panic by then – the risk is that they have a severe bout of nerves before September. Coordinated action may also spark a rally that lasts long enough for the US elections to be decided and for China to have carried out its change of leadership and the world should then be in a better position to tackle its economic problems from a political level.
Therefore the threat of global coordinated central bank intervention makes being short on risk assets or risk currencies dangerous for traders.