Over the weekend, we presented what according to Bank of America was perhaps the last remaining bullish catalyst for a big market move higher when Bank of America's Michael Hartnett said that "we remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions."
More importantly, Hartnett warned that a "weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord." He was envisioning the various key meetings in the coming weeks such as the G20 Shanghai (February 26-27); ECB (March 10), BoJ (March 15) & FOMC (March 16), with an emphasis on the first one as the clearest possible source of "surprise" risk upside.
The BofA strategist laid out a chart showing the relative performance of financial stocks to Treasurys, which has dropped to levels which in the past has always been accompanied by major policy interventions, implying that "the time has come" for another coordinated risk bailout:
As we explained, "Hartnett expects a "Shanghai Accord" to be unveiled next weekend, one where like the Plaza Accord three decades earlier, the Yuan will be massively depreciated, which ironically would halt all piecemeal Yuan devaluation on expectation of future devaluation (as it will have already happened), and reset global monetary policy stability if only for a few more months."
We concluded that "if next weekend the G-20 disappoints and unveils nothing, the next big leg down in the selloff will have arrived" and as BofA implied, the market could then sell off to the next support level, below the 1,812 which has proven so stable since August.
The only question left was whether or not the G-20 would actually go ahead and satisfy this expectation, or said otherwise, whether the market drop was sufficiently big to force the G-20's hand.
This morning we got the answer from Jack Lew who in an interview with Bloomberg "downplayed expectations for an emergency response to global market turbulence when Group of 20 finance chiefs and central bankers meet this week in China, calling on nations to do more to boost demand without pursuing unfair currency policies."
“Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.”
Policy makers from the world’s biggest economies are unlikely to make the kind of detailed national commitments to restore growth they did to at the height of the global financial crisis, Lew said. Instead, the group, which meets in Shanghai Feb. 26-27, may put more “meat on the bones” of the principles it has advocated in recent years, such as by strengthening the pledge that nations will refrain from competitive currency devaluations, he said.
In other words, instead of another monetary policy sugar fix, the US Treasury Secretary is demand that world governments focus on a fiscal boost, one which may have already taken place in China courtesy of the unprecedented surge in loan issuance, which the rest of the world remains deeply mired in political contention which would make a coordinate response highly unlikely.
Lew went on: "While the world economy isn’t in a moment of crisis", Lew said that "I don’t think it’s unreasonable to have the expectation that coming out of this will be a more stable understanding of what the future may look like." But don't expect too much.
Lew’s comments discount the prospect of a coordinated agreement to boost lackluster global growth and restore confidence after a selloff in world stocks to start the year. Some analysts and investors have called for a modern-day Plaza Accord, the 1985 deal among major economies to weaken the dollar and stabilize currency markets.
The world’s cloudy growth outlook and policy makers’ potential response will dominate the agenda in Shanghai, according to people familiar with the talks. It’s unlikely to produce the kind of action that came out of the G-20 meeting in London in April 2009, when countries collectively pledged more than $1.1 trillion in stimulus to rejuvenate a then-hobbled global economy.
Instead of a coordinate response, Lew will instead push for a more serious commitment from other G-20 countries to use monetary policy, fiscal measures and structural reforms to stoke demand.
“You can’t count on the United States providing all the demand for the world. You can’t be the consumer of first and last resort,” he said, adding that China can do more to stimulate consumer demand and Europe and Japan can use fiscal policy to boost growth.
In other words, it's fingerpointing time, with the US now clearly demaning more from China. However, "more" does not mean a devaluation as that would unleash another round of major instability if the recent past is any indication. Lew made that quite explicit:
He said the U.S. will be pushing for a firmer commitment by nations not to try to boost their economies by depreciating their currencies.
“If the conversation were to go the other way, and you were to see some reticence to make the commitment to refrain from competitive devaluation and not take it a little bit of a step further, that would be a cause of real concern,” Lew said.
Once again, all attention on China. "While the challenges facing China’s economy are “really quite significant,” Lew said, “they’re being interpreted in a way that is unduly negative.”
Still, he said a lack of communication about the country’s currency policy has “made it very hard for anyone to really understand what they were trying to accomplish.”
Lew reiterated the U.S. position that China needs to let the yuan go both “up and down with markets.”
Yes, down, but not too much down as that would be seen as "competitive devaluation." Perhaps the irony was lost on the Treasury secretary: “When there is pressure to appreciate, it has to be appreciating,” he said. “When there’s pressure to depreciation, we can’t complain if it depreciates.”
As a result, with the G-20 deus ex machina taken away, risk assets will scramble to find what the next major catalyst will be in the coming month, especially if the US has made it clear it will frown on more aggressive action by either the ECB or the BOJ in the next 30 days.