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Commentary on financial market developments – September 2020


USA: upcoming presidential election
COVID and the unprecedented build-up of central bank balance sheets


In September, virtually all major equity markets, with the exception of Japan, wrote off losses. The coronavirus pandemic and economic shutdown are gradually starting to affect corporate earnings and this is being reflected in stock prices. In addition, gold also lost value and the price of oil fell significantly, losing almost a tenth of its value.

In the United States, the presidential elections are approaching. At the end of September, the first debate between the candidates took place, out of a total of three planned. The debate was very heated, with the two candidates jumping into each other’s arms and the moderator having problems keeping the debate in order. Commentators generally agree that the level of the debate was perhaps the worst in the whole history. The irreconcilability of the two camps illustrates the deep divisions in American society, which will not be reconciled even by the final outcome of the election. This has been indirectly indicated by the current President, Donald Trump, who has not ruled out the possibility of refusing to accept the result of the election because of possible fraud with absentee voting. The radicalisation of US politics is by no means good news for investors, as it also puts a strain on the economic life of American society.

In today’s commentary, we take a closer look at the unprecedented monetary expansion to which both EU and US central banks, namely the European ECB and the US Fed, have resorted. The current printing of money in an extremely short period of time far exceeds the additions to the balance sheets of these central banks during the financial crisis.
The ECB has now purchased EUR 6.5 trillion worth of securities, having ended the financial crisis with a balance sheet level of ‘only’ EUR 2 trillion.

The US Fed is behaving similarly, having weathered the financial crisis with a balance sheet total of USD 2 trillion, and now, in a pandemic, has already increased its securities purchases to USD 7 trillion.

Central bank interventions in financial markets play a key role today. Central banks’ purchases (especially of bonds) lower interest rates and thus bond yields, driving investors to buy equities, which are thus relatively more profitable. In addition, they postpone the bankruptcies of over-indebted countries (this is particularly true of the southern eurozone countries). The question is whether this is a good thing or a bad thing. Another question is whether it is good or bad in the short term and even more so in the long term…

The current mix of extremely loose monetary policy and huge government spending is “helpful” in the short term in that we may not feel the economic effects of the pandemic in practice, but in the long term we have once again only saddled future generations with bad debts on the balance sheets of central banks and the states themselves. This is not to say that all state aid is bad, just to point out the obvious fact that there is never a period of repayment and balance sheet cleaning after aid.

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