Last Updated : 24 April 2013 at 15:00 IST
It is greed and fear that drives the markets. But what drives the economy is hope. When it comes to economics of commodities, the ultimate hope is the hope of Quantitative Easing.
We know it all started with the Great Recession.
Unconventional monetary tools were suddenly deployed to create a new normal with a hope to draw some sanity from them. US, Europe, China, Japan, India...the list of regions and nations that employed stimulus measures goes endless.
Now, the sudden spurt in gold, silver and copper prices is attributed to a new round of hope of monetary easing. This hope has arrived because the economic activity around the world is exhibiting signs of slowdown.
Just go through the recent numbers:
Factory activity in the US for April--preliminary, factory purchasing managers' index fell to 52.0 this month from 54.6 in March--expanded at its slowest pace in six months. But the housing sales data at their second-highest level in 3 years provided some anchor.
HSBC Flash China Manufacturing PMI for April gave a reading of 50.5 compared to 51.6 in March. A reading above 50 is indicative of expansion in the economy. But the dip from March levels is surely a cause of concern.
Flash China Manufacturing Output Index provided a reading of 51.1 compared to 53.0 in March, a two-month low.
Private sector activity in Eurozone too declined, amid business activity in Germany dropping.
All these economic events are pointing towards yet another possibility of a fresh round of global easing measures, analysts say. Will that be the case?
The case of US
We know that in US a round of stimulus measures is already underway. The US Federal Reserve is currently running its fourth round of Quantitative Easing measures. The latest round of easing is seeing to it that $85 billion in bonds and Mortgage Backed Securities are purchased by the US Federal Reserve on a monthly basis.
“I don't think there will be an additional round of Quantitative Easing measures from US. On the contrary they are seeking to exit the stimulus measures as exiting is also important.” said V.K. Vijayakumar, Chief Investment Strategist, Geojit BNP Paribas, South India.
The US Federal Reserve has tied QE measures to a positive evolution of job markets and a healthy inflation. Latest data suggests that unemployment rate in different US States dipped in March year on year including California where joblessness dipped to a low in 4 years. The housing bubble in US which invited the global downturn had destroyed the associated job markets there on a substantial scale.
Now, with new home sales and housing starts gaining momentum, US economy is trudging on a path of return. For instance, new housing starts climbed 7% in March from February to touch an annual rate of 1,036,000, and were up by 46.7 percent compared to March 2012.
"The good news is that the recovery is spreading beyond the [San Francisco] Bay Area. There are parts of southern California, such as Los Angeles County, that were badly hit by the housing crash, that are showing signs of recovery," California, he said Reuters, "is emerging again as an economic growth leader led by traditional strengths in technology, trade, tourism, agriculture and the application of creativity to the design of goods and services in demand worldwide".
This trend, if it sustains can see a phase out of Quantitative Easing.
Also, it has to be noted that the jobless claims in US climbed 4000 in figures to a seasonally adjusted 352,000 for the week ending April 13. However, the rise was in line with the expectations fielded by economists even as the claims stood near a line economists normally associate with average monthly job gains of more than 150,000.
The US recovery may at best be termed fragile, and a few indicators are not sufficient enough to hold forth the true picture. Nonetheless, it gives a picture and sunshine as of now outshines the shadows.
So, one can say that another round of monetary stimulus measures is least forthcoming from US.
The case of Europe
An April 4 report appeared in the Bloomberg hints at the possibility of a stimulus measure to be adopted by Eurozone.
“We are considering both standard and non-standard measures” to increase stimulus, ECB President Mario Draghi was quoted by Bloomberg. He was mum on what the tools are.
“Our monetary policy stance will remain accommodative for as long as needed,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 0.75 percent. “We will assess all the incoming data in the coming weeks and we stand ready to act.”
Meanwhile, in Europe, the Eurozone nations cannot think of stimulus measures as Germany has vehement opposition to such a move.
"The deficit reduction in the eurozone must continue," said Wolfgang Schäuble, the German finance minister raising his voice over and above stimulus measures; after all, Schauble is the pay master of the Eurozone.
"Europe can't function without solving the structural problems." he added.
Germany is still haunted by the specter of hyper inflation episode it experienced in its formative years.
Now, if Germany will have its way, then chances are more that Eurozone would maintain the current status of depressive growth.
However, the picture is not definitive as Gavin Hewitt Europe Editor of The BBC notes in a an analysis titled 'Europe: Retreat from austerity':
Like the arrival of a new season, all the signs are that Europe is in retreat from austerity.
The retreat is disguised, but cannot be concealed. The President of the European Commission, Jose Manuel Barroso, said: "While I think 'austerity' is fundamentally right, I think it has reached its limit."
He implied that a policy can only be pursued if it has "a minimum of political and social support". There is not a general recanting yet, but the explanations are flying thick and fast as to why the policy that Europe has embraced for the past three years must change.
"A period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed." The EU's Economics Commissioner, Olli Rehn, too said.
If this idea goes viral, chances are more that the Eurozone austerity drive would come to an end even as Germany would be forced to tow the stimulus line. After all, the German economy is also slowing down.
The case of China
Meanwhile, in China, yet another big economy, there are problems of inflation and asset bubbles. “This would deter the Chinese leadership from employing yet another round of stimulus measures,” Vijayakumar noted.
While additional stimulus measures by US and China can be ruled out, the same cannot be the case for Eurozone. The general mood of Eurozone is drifting towards consumption/stimulus led growth rather than austerity driven recovery.
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