Stockmarkets took a knock yesterday.
The US Federal Reserve's minutes suggested that the Fed might be keener to raise rates again in June than markets had expected.
No more cheap money? Argh! That would be scary for all concerned.
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Which is why it won't happen
If the Fed raises rates in June, it betrays poor old Davos man
Which is why I don't think an interest rate rise will happen in June, despite murmurings in the latest set of Fed minutes.
Regardless of how good the data is between now and then, the Fed will have plenty of excuses next month.
Just one very obvious example if the Fed does raise interest rates on 15 June, it makes all the fuss over Brexit look like an intense over-reaction. Bit embarrassing for all concerned, in fact.
Think about it. On the one hand, you'd have the International Monetary Fund and the OECD and the rest all warning that Brexit would be a harbinger of the financial apocalypse. On the other, you'd have the world's most powerful central bank which has been very keen to let us know how much it cares about what's going on in the rest of the world basically saying "Brexit? Meh", barely a week before the vote took place.
I'm not saying the Fed should care about a vote that's taking place in another part of the world on what's ultimately a domestic matter and my own view on Brexit is that it'll be far from apocalyptic regardless of the outcome. But for the Fed to raise rates going into the vote would be something of a betrayal of the global establishment: Davos man would be forced to tut aggressively.
So I can't see a June rise happening.
The power overload of central banks
It's a fine balancing act. And it's getting ever harder. Because it's not just investors the Fed and other central banks need to keep an eye on now. It's foreign politicians too.
You see, we've devolved a huge amount of responsibility to central banks in a relatively few decades. There's a saying, which many attribute to the founder of the Rothschild dynasty, that goes along the lines of: "Give me control of a nation's money and I care not who makes its laws". You only have to look at what's happened since the global financial crisis to see how true this is.
Governments have relied on monetary policy and "stimulus" to get us out of this hole. In doing so, they've effectively handed over fiscal policy to central banks too. Quantitative easing (QE) inflates asset prices. In effect, it redistributes wealth from the asset-poor to the asset-rich. The next step "helicopter money" is when central banks get directly into fiscal policy, printing money for governments to spend.
(The good thing is that central banks don't have standing armies. And the kinds of people who rise to take charge of them (so far) seem to be well-meaning academic sorts, not megalomaniacs. But power corrupts, and all that.)
Anyway, now we're increasingly dumping foreign policy on them too. This weekend, the G7's finance ministers are all getting together in Sendai, in the north of Japan.
The Shanghai Accord strikes back
So, according to the mutterings in the currency market, the assembled great and good hit upon the Shanghai Accord. This is an echo of the Plaza Accord, back in the 1980s, when the world's governments got together to make the dollar weaker.
This time, they agreed to weaken the US dollar in order to weaken China's currency (which is linked to the dollar) without China having to do an explicit major devaluation, which would have triggered a massive market panic.
Was something as formal as this actually discussed? Who knows and put bluntly, who cares? You can indulge your conspiracy fantasies or you can dismiss it all, depending on your preferred way of looking at the world.
The reality is that it was pretty clear at the start of the year that the solution to the market panic was a weaker dollar. So it's likely that the Fed would have taken the dovish route regardless of any G20 currency war discussions.
Japan couldn't object, given its own massive devaluation in recent years. As for Europe haha, good luck with that Mario Draghi is too busy fending off angry Germans to worry about anyone else.
Meanwhile, as Roger Blitz notes in the FT, the US government has been warning other nations that it's onto their currency games (yes, it's ironic and cheeky, but the person with the biggest stick gets to be ruder than most about these things). China, Germany, Japan and South Korea are all on a US "currency watchlist" a warning against more currency war shenanigans.
But now, 12 weeks on from the G20 meeting, things look a bit different. Markets have calmed down. The dollar has not just stabilised but cratered. And Japan is under pressure to get the yen on the slide again.
So it's little wonder that the Fed has decided to juice the US currency a little. That should smooth talks with a rattled Japan in particular.
Trouble is, this "truce" can only last for so long. Sooner or later, notes Blitz, "the US, Japan or China is going to decide that domestic policy needs trump FX stability". Then the gloves will be off again.
For now, my money is on Japan cracking first, which is one reason I'm happy to keep holding Japanese stocks. Meanwhile, I can't see the Fed lacking in excuses to keep interest rates on hold until after the US election in November. That's why, despite the recent slowdown in its rally, I'm also happy to keep hanging on to gold.
