Global stock markets still depend on low-cost money for support

stocks Sept14The blog’s 6-monthly review of global stock markets highlights the narrow nature of the advance since September 2008, when the blog first began analysing developments.  It shows their performance since the pre-Crisis peak for each market, and the performance of the US 30-year Treasury bond.

Remarkably, only the US, India, Germany and the UK stock markets are in positive territory, along with the 30-year bond.  Japan, Brazil, Russia and China remain well below their previous peaks:

  • The 30-year bond remains the best performer, as investors fear that a sustained economic recovery remains as far away as ever (purple line)
  • The US had been the best stock market performer till now, driven by the US Federal Reserve’s belief that a strong stock market would spur economic recovery (green)
  • India has now become the best performer, due to hopes for broad economic reform from the new Modi government (black)
  • Germany is next, supported by hopes the European Central Bank will continue to follow the Fed’s low-cost money approach (orange)
  • The UK has just slipped into positive territory, also supported by Bank of England stimulus (pink)

A number of major markets remain in negative territory:

  • Japan strengthened in 2012 as the Abe government followed the Fed’s policy, but has recently seen a slowdown as GDP fell in Q2 (blue)
  • Brazil had weakened, despite the World Cup and 2016 Olympics stimulus, but recent polls lead investors to hope for a change of government next month (brown)
  • Russia’s recovery also ended rather early, despite the boost from high oil and commodity prices, and Ukraine developments have caused it to move sideways (red)
  • China’s market has never seen a recovery, as investors have preferred to speculate in the housing bubble, where prices have been doubling every 2 – 3 years (blue)

All-in-all it is hard with the benefit of hindsight to argue with September 2008’s conclusion, as the storm began to break:

This pattern seems to confirm the blog’s long-standing concern that we may now be facing a multi-year global slowdown, as the financial excesses of the 2003-7 boom are unwound.”

Those markets where there has been little direct central bank stimulus have found it very hard to recover.  This is quite contrary to the pre-2008 experience, when ‘a rising tide lifted all ships’.

The blog will look in more detail at the US equity market next week, as it concludes its mini-series on the Great Unwinding of stimulus policy now underway.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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