Markets shrugged off their previous nervousness at the start of the G20 meeting of finance ministers and central bankers in Shanghai earlier today.
For the risk bounce to extend, the G20 meeting would have to deliver in one of the three key areas: better coordination of the divergent monetary policies around the world; augmenting monetary easing with fiscal stimulus and strengthened commitment to avoid policies pursuing competitive devaluation.
In theory, the G20 statement should deliver on all three of the above.
In reality, however, we suspect that the most likely outcome could be commitment by some governments to prop up faltering private capex especially in commodity and manufacturing exporters. In addition, there could be strengthened commitment to improve transparency of the official policy on exchange rates (eg China) and to avoid competitive devaluation. Central bank negative rates and their role as a tool to cheapen the currency could be discussed but will likely be seen as part of the policy arsenal to fight disinflation and support growth. If anything, given recent market concerns, we suspect that the G20 central banks could signal they will accompany further cuts below zero by measures to boost the strength of their respective banking sector. The coordination of the divergent monetary cycles could be addressed as well but we doubt that the statement will go as far as calling on the Fed to slow down its tightening cycle because of the volatility abroad.
We expect market risk sentiment to recover some more after the G20 meeting.
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