As global equity markets over the past few months have been buoyed by QE/monetary easing from the Fed, ECB, BoE, BoJ, PBOC, Indonesia, Thailand, and Philippines to name a few, it may well be for now, and I emphasize for now, that LTRO2 tomorrow may be the last one of substance for a while. Will it further sustain the equity market rally or will it cap it? Looking at US stock market reactions over the past few years after QE1 and QE2 ended, they rolled over each time. While I’m not sure of the extent of the downside over the next few months, I think the equity market rally since last Sept ends within days in a post QE hangover. Also, while longer term US Treasury yields have been suppressed by OT, the extent of it doesn’t square with the optimism of equity markets. On Dec 21st, the day of LTRO1, the 10 yr yield closed at 1.97%. Today it’s at 1.92%. Treasuries are just not drinking the ‘everything is fine’ Kool Aid.
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