Wealthy Nations Daily Update - Central Banks

As central banks continue to face headwinds from increasing global growth and deflationary concerns, there has been talk of the US either lowering rates even further (to negative rates) or in fact unleashing QE4. However, neither option has been mentioned by Fed members, the majority of whom have insisted that we will see a rate rise this year. With only two more meetings to go, and after the disappointing US nonfarm payroll release for September last week, a number of market makers have revised their expectations for rate “lift-off” out to 2016. The minutes from the FOMC’s meeting in September will be released later today; we expect very little in the way of change to rhetoric.

The problem that developed markets face, unlike the likes of China, is that they are sitting on very little stimulus cushion in the face of a global financial crisis. The IMF have warned that the risk of a global financial crash and thus recession are increasing unless governments and policymakers remain vigilant and are open to providing further stimulus in the face of global malaise. José Viñals, IMF financial counsellor said there is a current “triad of risks” hanging over the global economy: first, the emerging market vulnerabilities, then there is the euro area crisis legacy, and lastly, concerns over whether global markets can respond under the strain and cushion, rather than send shocks through the financial system. On discussing the impending US rate rise, he said “The risks of a premature tightening are greater than those of waiting two or three more months,” but that again brings us back to the lack of stimulus cushion.

Elsewhere, we heard yesterday that the global slowdown and commodity rout has forced Norway to dip into its huge oil savings, for the first time, to fill the budget hole and boost its economy. The budget plans imply the minority conservative government will withdraw a total of NOK 3.7bn (~USD 450m) from the country’s sovereign wealth fund, which is currently the world’s largest, at USD 820bn. Norway is not the only oil dependant country dipping into reserves, and this is not as alarming as most suggest, however, the opposition Labour party says it is “surprised” that Norway has reached this point now, stating that they did not expect this to happen for another 20 years.

Our Net Foreign Asset (NFA) model allows us to pinpoint vulnerable countries, especially in times of economic stress, this allows us to judge whether or not we should hold the country’s debt or not. We identify that Norway, has an NFA as a percentage of GDP of 133%, a “7 star country” which is comfortably within our investment parameters. It will take a considerable time for a country such as Norway to work its way through its vast reserves, to a point where we would be concerned.