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After years of central bank asset purchases and monetary expansion, the Fed has started to unwind its balance sheet, and other central banks will follow suit in coming years, suggests the analysis team at Nordea Markets.

Key Quotes

“After central banks having added more than USD 2 trillion of liquidity to the system in 2017,  liquidity will contract in 2019.”

“It may be that the process of winding down these crisis-era tools will be “like watching paint dry”, to borrow a quote from former Federal Reserve Chair Yellen. But, truth be told;  Quantitative Tightening – the reversal of Quantitative Easing – has the potential to carry with it significant negative market impacts.  What if it was the actual purchases and associated liquidity creation that mattered?”

“The dollar may strengthen further in coming months, as  the Fed’s tightening may, counter-intuitively, have a greater negative impact outside the US than inside. As former Treasury Secretary Connally once said about the dollar: it “is our currency but your problem”.”

“Global growth is at risk of decelerating more than currently anticipated.  Moreover, as other central banks slow their asset purchases and eventually cease altogether, there will be a greater supply of credit and duration risk for the private sector to absorb. Risk sentiment, including the appetite for credit products, may struggle.”

“While it is difficult to quantify the potential market impact, stock vs. flow effects, and so on, we believe  the direction is clear: the investment party is over.”