The world looks like it’s heading for a “triple taper tantrum” next year, according to Morgan Stanley — when the world’s three biggest and most important central banks all try to wind back the quantitative easing (QE) programmes of recent years.
These three central banks govern the systemically important G3 currencies — the euro, yen and dollar — which are more traded and relied upon in international finance than any others.
The original “taper tantrum” was the volatile market reaction when then Fed chair Ben Bernanke suggested in May 2013 that the US central bank could begin slowing down its monthly QE purchases later that year.
It sent equities in some dollar-dependent emerging markets tumbling, and US bond yields spiked:
This time, Morgan Stanley expects that the Fed will be looking to sell off some of the large stock of mortgage-backed securities (MBS) that it bought as part of its QE programme. At the same time, the European Central Bank (ECB) and Bank of Japan (BoJ) will be slowing down their ongoing bond purchases.
Here’s Morgan Stanley:
If growth and inflation improve in both the euro area and Japan the way our economics teams expect them to, we expect a triple taper through:
i) Disinvestment of the MBS portfolio by the Fed some time in 1H16 (3-6 months after we expect the first rate hike in December 2015);
ii) A tapering of QE purchases in the euro area in 2H16; and
iii) A tapering of QE purchases in Japan in 2H16.
None of these are yet on investor screens in a manner that affects their investment decisions, if our conversations are anything to go by.
Morgan Stanley’s analysts are suggesting that the pre-emptive reaction to this event could even happen this year — the original tantrum didn’t kick off when tapering actually began, but when markets began to expect that it would.
Some discussion among analysts about whether the ECB will taper early has already started, after a run of surprisingly good economic data.
However, the US data is a little weaker right now, and Japan’s isn’t particularly strong. But Morgan Stanley expect both to see an improvement:
For the tantrum stars to align themselves, the improvement in the data in the euro area would have to continue, along with improvement in Japan and a stronger showing in the US in 2H15, which we continue to expect from both the consumption and capex side.
If those stars do start to align, with clear cyclical recoveries in Japan, the eurozone and the US, then the possibility of the “triple taper” might start to get very real.
Last month the International Monetary Fund’s Jose Vinals even warned of a “super taper tantrum” to come, as markets struggle to adjust to a world of rising interest rates around the world — since such a scenario hasn’t really been seen for eight years.