Morning Commentary: The Global Placebo Effect

Foreign Exchange - Morning Commentary
The Global Placebo Effect
Share this story:
Facebook
Twitter
LinkedIn
Email
David Atkinson
David Atkinson
Foreign Exchange Sales Manager
I have been fascinated of late with the concept of the placebo or more accurately, the power of the human mind.  I heard recently that when medical placebos were really being studied in the latter part of the 20th century, over 1,000 medicines were discontinued because they could not beat the placebo effect – i.e. they performed no better than when tested against a placebo.

Global equity markets around the world rallied in sympathy with US stock markets that rallied 4-5% yesterday.  Even China saw stocks rise 3% on a Monday after the Friday when the country printed the worst ever set of manufacturing indices in history.  We all know that stocks go up and down for a variety of reasons; last week’s sell-off came after US indices had hit fresh record highs.  You can try to pin it all on COVID-19 fears, but the truth is, that is just part of it.

Similarly, yesterday’s stock recovery no doubt had some investors picking through the wreckage for cheap stocks to buy, but in a headline driven world, the story was that the impetus was “expectations of central bank action,” notably after Fed Chair Powell said as much in a statement last Friday.  Today, the G7 finance ministers had a group call where they pledged to use “all appropriate policy tools” to fight an economic slowdown as the virus spreads around the world.

This begs the question though as to what tools will work.  We have already seen two rate cuts this morning from Australia and Malaysia.  The former was noted in a tweet by the president, who called on the Fed to follow suit – which has been a theme of his for a long time.  As we noted yesterday, markets are pricing in a 100% chance of a 25 basis point cut from the Bank of Canada tomorrow and a more than 25 basis point cut from the Fed on March 18.

But are these effective?  A cut in benchmark rates doesn’t fix a supply-side shock to the economy.  Factories that close or movie theatres that are empty do not respond to interest rate cuts.  OK sure, at the margin, it can ease financial conditions, but it is well known that central banks are limited in their ability to help here.

In other words, cutting rates is a placebo – it makes you feel better even though there is really no actual benefit.  What is stranger in the markets is that this is well known.  Professionals know that cutting rates can hardly help, but the fact that as a group, if enough people reverse course on the news, then everyone will jump on board.

In other market indicators, longer term bond yields have recovered from their lows yesterday and the dollar is essentially unchanged.  Oil prices have stabilized after falling to lows not seen since December 2018.


 
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog