HOPE BURNS ETERNAL
While China and its ability to resurrect its economy and thereby presumably saving the world from a global recession remains the top theme driving the market, the return of an old friend, the divergence trade should be revisited. While our expectation remains that the Fed will raise rates next week, the ECB continues to express its willingness to introduce additional measures to stimulate Eurozone inflation. Japan is also faced with the prospect of needing additional stimulus as it is faced with potentially revising its growth and price forecasts downward. Rounding out the G-4 is the U.K., which has seen its rate-hike expectations gyrate wildly all year, with its meeting tomorrow potentially shedding light on weather a rate-hike is in the cards for early next year. While the themes of tightening policy from the Fed and BOE and looser policy from the ECB and BOJ has been with us for the past year, small tweaks to the ability of the ECB to buy more of an individual bond deal is being interpreted as the first step in additional QE for the EZ. While this may be true, the practical constraints of ECB buying more than the annual net issuance of qualified sovereign bonds creates practical constraints in the ability to expand the program. We suppose that extending the program remains an option, but with a year left in the current efforts, we wonder about the effectiveness of such an announcement. Our primary observation is that the disparity between these monetary regimes has not changed much since the start of the year, and keeping an eye on the reemergence of divergence trade is a worthwhile endeavor.