MIKE DOLAN: The success of 2022’s three market interventions — from the US to Japan and Britain

London — You can sometimes buck the market — for a time at least.

Even mention government or central bank intervention in financial markets to many professionals and you elicit a tirade on such futility against forces beyond control.

And yet again, 2022 proved that’s far from the truth.

Times are, of course, extraordinary. The messy, inflationary global economic reboot from a once-in-a-century pandemic was compounded this year by war in Ukraine, an energy shock and severe sanctions. Multiple subsidies and attempted price caps of one sort or another have followed.

Wartime historically almost always sees priorities shift. And free functioning markets tend to come low down on that list when faced with overarching security imperatives involving blood and treasure — especially if the former frustrates the latter.

While the pandemic of 2020/21 and geopolitical standoffs of 2022 were thankfully not “hot wars” for most Western powers, their economies were for all intents and purposes on a war footing.

Against that, this year was marked by three very different examples of direct financial market intervention that appear to have succeeded in their narrow and targeted goals at least — despite many doubts whether they would or even could work.

Crude oil, Japan’s yen and British gilts all had extremely turbulent years — even beyond the standards of a dire 2022 for most all world markets — and required direct action to calm the horses.

Please release me

Though the latest release of the US strategic petroleum reserve (SPR) to cool oil prices started late last year, it extended to the biggest direct SPR intervention in history after the February 2022 invasion of Ukraine.

As the SPR release now nears the end of its projected sales, the near 40% drop in the world crude benchmark from post-invasion peaks in March to levels seen a year ago may reasonably be seen as some cause for relief if not celebration.

Early post-invasion forecasts of crude prices anywhere between $150 and $200 a barrel have certainly proved well wide of the mark so far — even after oil-exporting nations cut production again. And it was at least in some part due to the SPR intervention, even if that was aided by central bank tightening and slowing world demand.

Yen for action

A dramatic offshoot of this energy shock were the shifting inflation sands, differing central bank responses and wild currency swings against a soaring dollar this year.

With the Federal Reserve tightening credit hard, the Bank of Japan’s (BOJ’s) determination not to follow as well as Japan’s ballooning oil-driven trade deficit saw the yen lose almost a quarter of its value at one point — forcing the dollar/yen exchange rate up more than 30% to 32-year highs near 150.

But after weeks of verbal warnings of excessive moves that just risked exaggerating Japan’s more muted inflation pulse, the BOJ stepped in for the first time this century in September and October with several rounds of intervention to buy yen for tens of billions of dollars.

Somewhat predictably, the initial response was that the BOJ would fail — not least with daily global currency market trading exceeding $7.5-trillion for the first time this year.

And yet — by accident, design, good timing or even sheer persistence — the BOJ’s actions put down a marker and calmed the move. Dollar/yen is now some 7% below last month’s peaks and its harrying dollar sales appear now to have at least coincided with a top in the whole dollar surge this year.

With the dollar widely viewed as overvalued, the open-ended BOJ move showed it had both the firepower and the stamina to see off frothy speculation at least — not unlike a similarly successful exercise by the European Central Bank (ECB) to buoy the new euro back in 2000.

Gilt trip

The third celebrated intervention of the year followed a more self-inflicted bout of volatility in Britain’s government bond market after September’s disastrously botched budget.

After a blinding spike in long-term government bond yields that almost blew up the country’s pension market and risked a resulting spiral, the Bank of England (BOE) was forced to intervene to buy so-called gilts for two weeks straight — with some considerable doubts about what would happen after.

Helped by a U-turn in government budget policy since, the BOE not only held the line, it dragged borrowing rates back down and squeezed excessive risk premia out of the market — so much so it was able to resume active sales of gilts from its balance sheet this month.

All three examples of market intervention had their own dynamics and drivers. Even though all were publicly aimed at reducing market excess and speculation — they all needed to affect prices, even if not a specific one.

Free markets are fine, but only up to a point.

For sceptics of such action, long-term fundamentals will still win out. Intervention can only serve as a temporary smoothing if price making is erratic — underlying policy settings would be needed to change direction.

But if you believe that extraordinary circumstances warrant extraordinary action — even if only to buy time during a fraught period of little visibility — then market intervention can work a treat and traders dismiss it at their peril.

Reuters