Last week was a rocky one on the stock markets, with London, Frankfurt, Paris and New York sliding heavily. Sort of a mini-crash, but not too serious… a simple warning showing some nervousness among investors: has the time of disillusion come? In Europe and Japan, stock market indices are below their January 1st, 2014, level, and in the United States, they’re just slightly above it.
The basic problem is that global liquidity is growing at a much higher pace than real economic growth. Even with the Fed stopping its QE, there is Japan accelerating its own QE and the European Central Bank is restarting its own plan, notably by buying banking assets. And all those central banks are maintaining rates at zero, which facilitates monetary expansion. The result being that all this excess money, which is not going into the real economy (loans to businesses haven’t picked up), finds its way on the markets and pushes asset prices higher. Hence the stock market performance since 2009 (March 2009 exactly, date of the first Fed QE).
But, at a certain level of appreciation, the prices of risky assets (stocks, corporate bonds) stop going up because investors realise that, obviously, the risk premiums are not enough to cover the risk anymore. And the fear is being reinforced by the fact that hopes for a real economic recovery are vanishing (the IMF lowered its previsions, a series of poor numbers were recently published in the United States and Germany).
How are investors reacting?
This post was published at Gold Broker on Oct 23, 2014.
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