The Coming Wave of
Global Central Bank Stimulus
and Stock Index Futures
By Alan Bush
Senior Research Analyst
From when the recession lows for stock index futures were made in March 2009, it has been
the global historically low interest rate policies that have been the driver behind the meteoric
gains. However, from time to time, there have been a variety of geopolitical events that have
temporarily interrupted the advance. And I stress the word temporary because every time
traders and analysts have become too focused on the geopolitical risk-off event de jour, this
market has been rescued by central bank accommodation.
Insurmountable Geopolitical Problems?
After making a record high on September 19, S&P 500 futures declined 6.8% due to a
multitude of bearish geopolitical problems, including tensions surrounding the Ukraine conflict
and Russian sanctions, the emergence of ISIS, social protests in Hong Kong and more recently
the spread of the Ebola virus. There were times that these negatives came in faster than some
central banks could ease credit, such as the European Central Bank, the People’s Bank of
China and the Bank of Japan, and faster than the Federal Reserve and the Bank of England
could talk back their hawkish rhetoric.
In a period of an especially heavy onslaught of what seemed to be insurmountable geopolitical
problems, stock index futures could only rally for one day when the Federal Open Market
Committee on October 8 released the bullish minutes from its September 16-17 policy
meeting. The minutes were surprisingly dovish after a lengthy period of mostly hawkish
statements. The minutes revealed what appeared to be a major shift in policy, as Federal
Reserve officials raised concerns about the increasing risks to the U.S. economy as a result
of the recent sharp gains in the U.S. dollar. Several policymakers said U.S. growth “might be
slower than they expected if foreign economic growth came in weaker than anticipated.” In
addition, Fed officials indicated concern that U.S. dollar strength could hurt U.S. exports.
Strength in the greenback has become a more pressing reason for the Fed to consider
delaying a hike in the fed funds rate. Since the release of the Fed minutes, comments from
Fed officials appear to be an almost unified effort to lengthen the timeframe for a fed funds
rate increase. For example, Federal Reserve Bank of Chicago President Charles Evans said he
believes it should be “quite some time” before the Fed can increase interest rates.
Federal Reserve Vice Chairman Stanley Fischer, who spoke at a panel discussion at the
International Monetary Fund and World Bank Group annual meetings in Washington, D.C., said
the Fed won’t increase interest rates until the U.S. expansion “has advanced far enough.” In
addition, he said “if foreign growth is weaker than anticipated, the consequences for the U.S.
economy could lead the Fed to remove accommodation more slowly than otherwise.” More
recently, San Francisco Federal Reserve Bank President John Williams said the U.S. central
bank should consider revisiting its asset purchase program if inflation falls well below the Fed’s
2% inflation target.
Some Central Banks More Accommodative - Others Less
Hawkish
The Bank of England has backed off from its hawkishness as well, when a Bank of England
Monetary Policy Committee member said the central bank is “not ready yet” for an increase in
interest rates. His comments pushed out prospects of an interest rate increase from the BoE
farther out into next year. Financial futures markets are now predicting the central bank of the
U.K. will delay an increase in its benchmark interest rate until September, 2015. It was only two
months ago that financial futures markets were predicting an interest rate increase in February,
2015.
The European Central Bank, already on a course of more accommodation, recently added
more stimulus to its economy when it bought bonds for the first time since ECB President
Mario Draghi in September revealed a bond purchase plan was being developed. In addition,
the People’s Bank of China lowered the interest rate it pays lenders for 14 day repurchase
agreements for a second time in a month in an effort to stimulate China’s economy.
More recently, the Bank of Japan apparently saw the light, as well. In a surprise move, Japan’s
central bank unexpectedly increased its target for its asset purchase program. The BoJ said it
will increase its holdings of government bonds to 80 trillion yen from 60 to 70 trillion yen and
increase exchange traded fund purchases to 3 trillion yen. The reaction in the marketplace
was almost instantaneous with December S&P 500 and December Dow Jones futures
advancing to new contract highs.
Outlook for Federal Reserve Policy
Although the consensus view is that the Fed will increase the fed funds rate target in the
second half of next year, it is our opinion that the FOMC may not be in a position to do so until
2016, at the earliest.
Federal Funds Target Rate
6.00%
Interest Rate
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1/2004
1/2005
1/2006
1/2007
1/2008
1/2009
1/2010
1/2011 1/2012
1/2013
1/2014
7/2004
7/2005
7/2006
7/2007
7/2008
7/2009
7/2010 7/2011
7/2012
7/2013
7/2014
More Accommodation Suggests Higher Stock Index Futures
There appears to be an increasing urgency on the part of central banks that are dovish, namely the
European Central Bank, the People’s Bank of China and the Bank of Japan, to become even more
dovish and other central banks, such as the U.S. Federal Reserve and the Bank of England, that are
hawkish to become less hawkish.
It is becoming very clear that a new wave of global central bank accommodation is already here
and more is on the way. The bullish influence of the globally low interest rate environment is likely
to become even more bullish for stock index futures and will overpower the bearish influence of the
ongoing geopolitical pressures. Expect the bull market for stock index futures to continue.
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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider
whether such trading is suitable for you in light of your financial condition. The risk of loss in trading futures and options can
be substantial. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM
Investor Services, Inc. or its staff. Research analyst does not currently maintain positions in the commodities specified within
this report. The information provided is designed to assist in your analysis and evaluation of the futures and options markets.
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