Summertime, when a trader's thoughts turn to stimulus
- The UK's exit from Europe (impending) has global implications. A lot of the costs are long term, impacting trend growth. Cyclically there are global consequences from the demand shock of the UK, the wealth effect of asset markets, and uncertainty about the future direction of policy in UK and the EU.
- Inevitably traders' thoughts have turned to stimulus. Of course they have. We have a generation of traders educated in the post 2007 environment, whose Pavlovian reaction to anything is "what is the policy stimulus response?".
- Currency weakness is not likely to be an effective response. Central bank policy works if there is no domestic credit bubble and if credit can substitute for weaker international demand. Fiscal policy, properly applied may be the most effective offset to UK induced weakness.
- UK PM Cameron has an EU heads of government summit, but as the UK will not even begin the exit process until Cameron exits there is little that can be done to resolve uncertainty. Germany's Merkel and the ECB's Draghi both speak, but the same comment applies to them.