By Mike Dolan
LONDON, November 23 (Reuters) – Sometimes you can beat the market, at least for a while.
Even mentioning government or central bank intervention in financial markets to many professionals and stirring up a diatribe over such futility against forces beyond your control.
And once again, 2022 has proved that to be far from the case.
Times are obviously extraordinary. The messy and inflationary global economic restart from a once-a-century pandemic has been exacerbated this year by war in Ukraine, an energy shock and swinging sanctions. Multiple subsidies and attempted price caps of one kind or another followed.
Historically, wartime almost always sees priorities change. And the free functioning of markets tends to sink to the bottom of that list in the face of general security imperatives involving blood and treasure, especially if the former frustrates the latter.
While the 2020/21 pandemic and 2022 geopolitical standoffs were thankfully not “hot wars” for most Western powers, their economies were effectively on a war footing.
On the contrary, this year has been marked by three very different examples of direct intervention in financial markets which appear to have achieved at least their narrow and targeted goals, despite many doubts as to whether they would or even could have worked.
Crude oil, the Japanese yen and British gilts have all had extremely turbulent years, even beyond the standards of a dire 2022 for most world markets, and have required direct action to calm the horses.
PLEASE LET ME GO
Although the latest release of the US Strategic Oil Reserve (SPR) has started to cool down oil prices at the end of last yearit extended to the largest direct SPR intervention in history after the February invasion of Ukraine.
As the SPR release nears the end of expected sales, the nearly 40% decline in global benchmark crude oil LCOc1 from the post-invasion peaks in March to the levels seen a year ago can reasonably be seen as cause for relief if not celebration.
Early post-invasion forecasts of crude prices in the $150-$200 a barrel range have certainly proven a long way off thus far, even after oil-exporting nations again cut production. And it was at least partly due to the SPR interventionalthough this was helped by central bank tightening and slowing global demand.
YEN FOR ACTION
A dramatic consequence of this energy shock has been the quicksand of inflation, differing central bank responses, and wild swings in the currency against a rising dollar this year.
With the Federal Reserve’s tough credit tightening, the Bank of Japan’s determination not to follow suit, as well as Japan’s oil-driven trade deficit, saw the yen lose nearly a quarter of its value at one point, forcing the dollar/yen exchange rate to rise more than a 30% 32-year high close to 150.
But after weeks of verbal warnings of excessive moves that risked only exaggerating Japan’s weaker inflationary impulse, the The Bank of Japan took action for the first time this century in September and October with several rounds of intervention to buy tens of billions of dollars worth of yen.
Predictably enough, the initial reply was that the BoJ would fail, not least by overshooting daily trading on the global currency market 7.5 trillion dollars for the first time this year.
Yet – by accident, design, good timing, or even sheer perseverance – the BOJ’s actions set a signal and calmed the move. The dollar/yen is now about 7% below last month’s highs and its dollar sell-off appears to have at least coincided with the peak of the dollar’s entire rise this year .DXY.
With the dollar widely seen as overvalued, the open-ended BOJ move proved to have both the firepower and the stamina to at least fend off the bubbling speculation – not unlike an equally successful exercise by the European Central Bank to prop up the new euro in 2000 .
The third notable intervention of the year followed a more self-inflicted bout of volatility in the UK government bond market after September’s disastrous failed budget.
After a blinding spike in long-term government bond yields that almost blew up the country’s pension market and risked a subsequent spiral, the The Bank of England was forced to intervene buy so-called gilts for two weeks in a row – with some considerable doubts about what would happen next.
Aided by a U-turn in government fiscal policy, the BoE not only held the line, but brought lending rates back down and eliminated excessive risk premiums from the market, allowing it to resume active selling of gilts from its balance sheet this month.
All three examples of market intervention had their own dynamics and drivers. While they all publicly aimed at reducing glut and speculation, they all had a need to influence prices, even if not a specific one.
Free markets are fine, but only up to a point.
For skeptics of such action, long-term fundamentals will continue to prevail. Intervention can only serve as a temporary leveling if price formation is erratic: underlying policy settings would be required to change direction.
But if you believe that extraordinary circumstances call for extraordinary action, if only to buy time during a low visibility period, then market intervention can work wonders and traders reject it at their peril.
The views expressed here are those of the author, a Reuters columnist.
SPR release and oil priceshttps://tmsnrt.rs/3ACVxvm
BOJ steps in to buy yen as it approaches 150/$https://tmsnrt.rs/3AF5b0C
BoE steps in to buy giltshttps://tmsnrt.rs/3TTfFQN
(Reporting by Mike Dolan; Editing by Jonathan Oatis)
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