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Sep 12th 2016, 14:12 by Buttonwood
TRADERS are now back at their desks, and markets are getting active again,
after a somnolent August. Friday saw the first significant sell-off (in both
bonds and equities) for a while and the trend continued on Monday morning.
German ten-year yields have soared to 0.03%.
The proximate cause seems to be central bank action and inaction. The Federal
Reserve looks more likely to increase rates this year while the European
Central Bank (ECB) failed to add any stimulus last week. The narrowing
presidential polls in America (and the health scare for Hillary Clinton) can be
thrown into the mix; there is not the usual investor enthusiasm for the
Republicans, given the nature of the nominee. (Indeed, fund managers polled by
Bank of America see a Turmp win as the second biggest risk after EU
disintegration).
But the underlying problem needs a new word stagfusion. Investors have become
used to low interest rates and bond yields since central banks started to
loosen policy in 2008. They have prospered from it, since asset valuations have
risen and corporate profits have held up well, particularly in America. But
they also grumble about it from time to time. Hedge-fund libertarians dislike
the amount of official intervention in the market; pension funds and insurance
companies have seen their liabilities rise because of lower yields; strategists
and economists worry about the prospect of secular stagnation, a prolonged
period of slow growth.
So investors are confused. They recognise that a world of zero interest rates
and negative bond yields is inherently strange and problematic and fear it can
t last forever. But they worry what will happen when they cease to benefit from
all that central bank support. Perhaps stagnation is better than the
alternative? Hence stagfusion .
And judging by the comments of the central bankers, investors aren t the only
ones to be confused. Many central bankers seem to worry that monetary policy
has done as much as it can, and that economies need structural reform (and
fiscal stimulus) if they are to prosper. They are also conscious of the fact
that they are getting dragged into the political arena and this makes them
uncomfortable. But they have mandates to meet, and if the other reforms do not
happen, what else can the Bank of Japan, the Bank of England and the ECB do but
stimulate? Meanwhile the Fed is clearly terrified of making the kind of
premature move that sabotaged the 1930s recovery (or Japan s in the 1990s). As
we have seen, big market moves may cause them to think again.
So we have what therapists might call an unhealthy relationship between the
central banks and the markets in which each is nervous about the other might do
and the latter is terribly dependent on the former. And divorce is out of the
question.