Tapering or The keystone for next weeks

Central Banks increasing their balance sheets

Following the massive and unprecedented financial support to the economy, central banks need to restore and strengthen their credibility, mainly by removing their aid.

  • Via its QE program, the Fed is buying $120bn/month of debt securities while the ECB increased the size of its balance sheet by 83% since the beginning of Covid-19. 
  • The chart on the right shows the central bank Balance sheet both in relative size to each other and as percentage of GDP.

Tapering on investor’s mind

The first step towards adjusting the monetary policy is by reducing the amount of securities they buy, also known as tapering. The second chart shows the normalized occurence of Google query “Tapering Fed”.

  • Tapering is becoming the main focus, after the Fed chair hinted tapering during the Jackson Hole web conference in late August. 
  • The market expectation on the pace of tapering of the various central banks will be a main macro driver for the months to come.

Dovish Taper

Considering both the slowing of global growth expectations and the need for the Fed to preserve credibility, we expect a soft and slow tapering that markets can tolerate.

  • A dovish tapering would confirm the low growth, low rates goldilocks environment of the past few years and is bullish for risky assets.
  • Quality growth stocks will continue to benefit in this situation.

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