Just as it was beginning to look like the bond market’s luck was finally running out, President Trump made some remarks that all but guarantee that the bond rally will go on for a little while longer.
Investors’ optimism remained at very high levels, despite the beginning of tapering of quantitative easing by the European Central Bank (ECB), tensions with North Korea and the Catalan crisis.
Well, wasn’t last week a bit of a cold shower for investors. European stock markets closed lower and US ones were flat last Friday, after nonfarm payrolls badly missed expectations in March.
In fact, it’s a surprise the markets declined so little. Investors had other things to worry about, too: President Trump’s surprise airstrike on Syria was a big one. The president, who until not long ago was making positive noises about his Syrian and Russian counterparts, changed his mind after a chemical weapons attack that killed many children.
The first quarter of 2017 is over, Brexit has been finally triggered and a period of political turmoil in Europe is ahead, with elections in France and Germany, and perhaps Italy too.
So far, it seems like nothing has been serious enough to give investors reason to pause the rally in stock markets. Both the US and the UK indices hit record highs — this could be a sign of confidence, but it could also mean the central banks’ easy monetary policies are still inflating asset prices.
There is a widespread view that the Federal Reserve will have to raise interest rates at a steady pace this year, because it cannot afford to fall behind the curve.
I would argue that it has already fallen behind the curve and has no choice but to remain there. And it is not the only one in this situation. All major central banks are playing the same game; they have no choice.
The Bank of England’s decision to borrow Mario Draghi’s bazooka has had immediate consequences: investors rushed into bonds like they’re the best investment out there. And what else could they have done? Ever since the financial crisis, central banks have dictated where investors should put their money, picking winners and losers in the markets with their asset purchases.
The recent risk rally still has legs — at least that’s the case judging by the Bull & Bear indicator compiled by Bank of America Merrill Lynch.
The way the markets have reacted to Brexit, you’d be forgiven to wonder what the fuss was all about.
The biggest question that is still unanswered after the 2007-2009 financial crisis is: why has growth been so slow? Compared to previous recessions, both in the US and in Europe, the rebound has felt more like an extension of the crisis rather than like a proper recovery, as in previous cases.
Almost two years ago, economist Andrew Smithers warned that US companies themselves were endangering the recovery. Little has changed since then, but public awareness of the problem is increasing, and with it, hopes that a solution is around the corner.
European equities are likely to continue to lead the stock markets higher into the end of the first quarter, but there will be some hiccups.
The technical picture looks good, but the question is whether technical factors and the aggressively interventionist monetary policy will be enough to put an end to the eurozone crisis for good.