Friday 15 June 2018

Markets rise on ECB taper plans but liquidity drain a risk

Markets mostly rose on Thursday.

The Nikkei 225 fell 0.9 percent early on Thursday but the STOXX Europe 600 jumped 1.2 percent and the S&P 500 rose 0.3 percent.

Markets mostly reacted positively to the outcome of the European Central Bank meeting on Thursday.

The ECB announced after the meeting that it will halve its bond buys to 15 billion euros a month from October through the end of December before ceasing. It will reinvest principal payments from maturing securities “for an extended period after the end of the net asset purchases” while keeping interest rates at their present all-time lows “at least through the summer of 2019”.

However, Thomas H. Kee Jr, founder of Stock Traders Daily, warned that the unwinding of stimulus from central banks presents risks to the stock market.

Kee said that the Fed and ECB will, in total, “begin to drain more liquidity from the financial system in July on a monthly basis than it was infusing on a monthly basis all of last year”.

“If stimulus policies served to bolster asset prices, the opposite will happen as they continue to remove liquidity,” he said. “A 40% correction in the S&P 500 is possible, and we expect it to be worse in the higher-beta markets.”

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