Morning Commentary: The Global Nocebo Effect

Foreign Exchange - Morning Commentary
The Global Nocebo Effect
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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
Today, you will probably learn a new word.  I had never even heard the term “nocebo” until hearing it on a financial markets podcast last week.  The medical definition of the nocebo effect is when “negative expectations of the patient regarding a treatment cause the treatment to have a more negative effect than it otherwise would have.”  The podcast I was listening to used the term in relation to low and negative interest rates, with the idea being that failure of such interest rate policy to spur activity in places like Europe just ends up making the situation worse.

Yesterday, I wondered if the Fed’s surprise 50 basis point rate cut would produce the same result after stocks tanked yet again by 2-3% and the US 10-year Treasury sank below 1% for the first time in history.  As we walk in today, things are not quite as bad.  Asian equity markets were somewhat mixed but overall nearly flat overnight.  European stock markets however started a rally of about 1% that has carried over into the US trading session.  The US 10-year is still below 1% but just barely.

As to where markets go from here, futures markets are almost fully pricing in a 10 basis point rate cut at the ECB’s meeting next Thursday, which would push the negative deposit rate from -0.50% to -0.60%.  Yeah, that will really help……Elsewhere, the market is almost fully pricing in a rate cut from 0.75% to 0.50% at the next Bank of England meeting on the 26th of this month. Markets expect more cuts in Australia, New Zealand and India.  Even after the 50 basis point shocker from the Fed yesterday, expectations are for yet another cut – at least 25 basis points if not another full 50 – at the upcoming March 18 meeting.

The other big news of yesterday was the Super Tuesday Democratic primaries.  As Saturday Night Live’s Weekend Update quipped, “Easter came early this year as someone just rose from the dead.”  That of course is the relatively strong performance by Joe Biden, who was written off as the Democratic nominee before his trouncing of the rest of the field in South Carolina.  We strive to stay politically neutral in this commentary, but politics do affect markets and there is a lot of commentary this morning that the bounce in US stocks are partly due to markets being happy to see Biden’s results at the expense of Bernie Sanders.

The US dollar is within fairly tight ranges today, much like it has been doing for the past several months in general.  Currency market eyes today are on the Canadian dollar as the Bank of Canada became the latest central bank to cut rates, which it did today by 50 basis points and noted that it will be “ready to adjust” further if needed.  Remember that less than a week ago there were essentially zero expectations of a rate cut today. 
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