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Here we go again

| Posted by: Paul Donovan | Tags: Paul Donovan

2018 starts with irrelevance. Let us hope this does not continue. The main data releases today are purchasing manager opinion poll surveys. These have little relevance to the real world.

Tensions in Iran are unlikely to have a significant financial market impact. Financial markets do not tend to price in extreme political outcomes. Past protests have rarely generated a market reaction. Oil distribution seems unlikely to be affected at the moment. Oil pipelines are rarely near urban centers.

One key change in 2018 is central bank tightening. For the first time in decades, the Fed will end 2018 with a smaller balance sheet than it started the year with. Central banks' motives have changed. Central banks are not trying to reduce inflation, slow demand or destroy pricing power. They are aiming to maintain economic balance.

Economically central bank tightening is aimed at keeping things as they are. In financial markets, the consequences are less clear. Fewer bonds will be bought. Whether liquidity in financial markets changes will partly depend on whether there is surplus liquidity or balanced liquidity in the economy. Risk appetite may be moving as well. This adds financial market uncertainty.