Euro is well and truly primed for disappointment
Stock markets and risk currencies like EUR and GBP have had a splendid
Summer basking in the warm glow of expectation over central bank action to
revive the flagging world economy. That could shortly end.
The current optimism could be misplaced and the first disappointment could
materialise as early as this Friday when the world's central bankers meet
at Jackson Hole, Wyoming. It is heavily anticipated that the US Federal
Reserve will give some indication over a third round of quantitative
easing, probably just after its meeting September 12-13.
So why wouldn't the Fed follow that script? Because the US faces a hotly
contested election to be held November 6 and the Fed will not want to be
seen influencing the outcome.
Yet the most important central bank at the moment is arguably the European
Central Bank as the Eurozone is the current epicentre of the financial
crisis. The ECB's top bankers are skipping the Jackson Hole gig to thrash
out a plan to handle bond yields in peripheral Eurozone countries –
currently a key influence on the value of the Euro -- ahead of their
meeting on September 6. On September 12 the German constitutional court
will decide on the legality of a permanent Eurozone bailout fund.
So what could go wrong here? Given the Eurozone's track record in crisis
management – plenty. There's a deep rift between between Germany and much
of the rest of Europe over how to save the Euro and deal with struggling
peripheral states, so lots to disagree on. Also, there is no guarantee that
the German constitutional court will rule in favour of a Eurozone bailout
fund – which is supposed to work with the ECB to stabilise peripheral bond
markets. Deeply troubled Greece is another potential flash point.
Also, if risk asset values are stable then it is less likely that the
leading central banks will want to intervene and squander their ammunition.
A rather familiar choreography could play out whereby risk currencies and
stock markets plunge on disappointment and galvanise leading central banks
and governments into saving the day – possibly in a coordinated fashion.