Since late 2008, the world’s central banks have been in a race against time. They have expanded their balance sheets wildly, purchasing a total of $10.5 trillion dollars worth of assets in an attempt to stabilize markets. This has inflated bubbles in both equities and the bond market. As we reported previously, the level of the Federal Reserves total assets explains 93% of the variance in the S&P 500 index.
Today we take a more detailed look at the balance sheets of the Fed, Bank of England (BOE), European Central Bank (ECB), and Bank of Japan (BOJ). Together they hold over $16 trillion dollars worth of assets on their balance sheets. Much of this has been used to purchase government debt.
The following is a matrix showing how correlated various central bank balance sheets are with each other, as well as four global stock indices: the S&P 500, DAX, FTSE 100, and Nikkei 225.
As we can see, the ECB is off in its own planet. Its balance sheet has the lowest average correlation with both other central banks as well as asset markets. Put simply, the ECB’s balance expansion had little effect on asset prices; they have not coordinated their monetary easing operations with other banks.
Moreover, their expansion was the weakest of any major central bank, purchasing only $729 billion worth of assets, versus $3.5 trillion and $4.8 trillion for the Fed and BOE, respectively. They started out on the same trajectory as the Fed, even overtaking it for a brief moment in 2011. Then the ECB took their foot off the gas; now they are trying to restart a stalled economic engine.
The clear winner in terms of overall market clout is the Federal Reserve. Its will be done. Markets have the highest correlations with the total size of the Federal Reserves balance sheet. Both the DAX and the S&P 500 indices have over 90% correlations with total assets.
The Bank of Japan engaged in monetary policy most similar to that of the Federal Reserve. The Nikkei 225 has a high correlation with the level of BOJ asset purchases. The BOE was the most aggressive in their quantitative easing, but failed to influence asset prices to the same degree as the BOJ and the Fed.