Anyone hoping this week’s G-20 meeting would yield some manner of “Shanghai Accord” to revive sluggish global growth, pull the global economy out of the deflationary doldrums and calm jittery markets that have seen harrowing bouts of volatility in the first two months of the year are disappointed on Saturday.
The joint communique issued by policymakers at the end of the two-day summit is bland and generic, with officials parroting vacuous promises to avoid competitive currency devaluations and maintain monetary policies aimed at supporting economic activity and price stability.
Officials pledged to “consult closely” on FX markets, a reference presumably to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.
The statement also “acknowledges” the fact that geopolitical risks abound and as Bloomberg noted this morning, “officials added a potential ‘Brexit’ to its long worry list in the communique.”
“That’s a win for Chancellor of the Exchequer George Osborne, who had sought to rally international finance chiefs behind the campaign to keep Britain in the European Union,” Bloomberg goes on to point out.
"Downside risks and vulnerabilities have risen," due to volatile capital flows and slumping commodities but - and this was a critical passage - “monetary policy alone cannot lead to balanced growth."
What?! We thought counter-cyclical Keynesian tinkering was the magic elixir. A cure-all that smooths business cycles and creates demand out of thin air. Now you’re telling us it “can’t lead to balanced growth” and implicitly that Paul Krugman is a snake oil salesman? This can’t be.
(Janet is not amused)
“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth," the statment continues, in a rather dour assessment of the economic landscape. "While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy," officials added.
Right. If markets were "reflecting the underlying fundamentals" of this global deflationary trainwreck, things would probably be even more volatile.
Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. "Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path," the statement reads.
So countries will somehow adopt expansionary fiscal policies without resorting to deficit financing via debt sales. So, magic. Got it.
Long story short, there is no "Shanghai Accord" akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth. All we have here is a generic statement and empty promises.
"Investor hopes of coordinated policy actions proved to be pure fantasy," said TCW's David Loevinger, a former China specialist at the U.S. Treasury. "It’s every country for themselves."
Yes it is which means the great yuan devaluation will continue unabated as will the competitive easing.
This isn't a good thing for markets. As Citi's Steve Englander wrote yesterday, "they won't save the world but probably convince investors that global policymakers are sufficiently on the same page to add to global confidence."
Well guess what? They didn't. We close with the likely read through for markets from Citi's Brent Donnelly:
The G20 draft communiqué looks like it is out and it seems pretty tepid / uninspiring. So the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting. I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.