Fear not the QE2 backlash

SunClouds.jpgNothing lasts forever. You never know what’s going to derail a fantastic bull run – at least temporarily.

After unimpeded optimism over several months fueled by the continuing global economic recovery, some serious concerns are coming out of the woodwork.

Expectations for an interest rate hike in China to tame growing inflation threw cold water on world stock markets last Monday. Meanwhile, fears about Ireland’s debt crisis and an impending bailout by the EU and the International Monetary Fund (IMF) continued to build.

The crisis in Ireland is also fueling fears about credit problems in other European countries such as Portugal and Spain – a stark reminder that the credit problems in the Eurozone are far from over.

And in the US, the Federal Reserve is facing a growing backlash over its $600bn (€444bn) quantitative easing policy, known as QE2 – both home and abroad. The program is meant to pump money into the economy and lower interest rates further.

But in the early going, the bond market is just not cooperating. US government debt prices are falling, pushing up yields, rather than the other way around.

While the US Federal Reserve is buying Treasuries, investors are selling. It could just be a case of “selling on the news” as prices had already run up substantially in anticipation of the QE2 announcement, but if yields keep rising unchecked for a prolonged period, the Fed will lose credibility.

Critics complain that QE2 could lead to rampant inflation, while other nations also slammed the easy money policy, pointing out that the US is unfairly devaluing the dollar to boost exports. That makes US goods more competitive at the expense of its neighbors.

But thus far, inflation remains contained in the US. The core Consumer Price Index (CPI), which excludes the volatile food and energy components, was unchanged in October for the third month in a row. Price increases in basic materials have not yet translated into higher consumer prices in the US.

In the global chemical markets, producers are riding the wave of rising prices – from the Americas to Europe to Asia.

Voracious Chinese demand and the US QE2 program are boosting petrochemical and polymer prices in Asia, reports Felicia Loo, one of our ICIS pricing editors in Singapore.

“It is a bullish market. The feel is bullish and everything is bullish,” said one Chinese polymers trader.

 

Photo credit: www.traveladventures.org

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