Markets worry real world issues may trump monetary stimulus

Economic growth

SHARE THIS STORY

Index Oct15

Something has clearly changed in global financial markets in recent weeks.  Not only have they been falling, but real world issues have begun to provide a negative impact.  This sounds a strange statement.  But it simply means that in the past, markets have seen “bad news” as being good news.  They expected that it would force central banks to provide more stimulus, as the Boom/Gloom Index chart above shows:

  • The first stimulus package in 2009 took the US S&P 500 Index up 61% between March 2009 – April 2010
  • QE2 took it up 32% between June 2010 – April 2011: Twist took it up another 27% between Sept 2011 -Sept 2012
  • Since then, an unbroken ride took it up 32% by July, as US, EU and Japanese central banks printed cash

The idea behind the stimulus programme was that creating a ‘wealth effect’ in financial markets would somehow lead to sustainable recovery in the real economy, as then Fed Chairman Ben Bernanke argued in 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion”

In this, the Fed abandoned its historical role, as described by an earlier Chairman, William McChesney that:

“The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting”

Unsurprisingly, given the demographic headwinds, the new stimulus policy hasn’t worked:

And interestingly, one Fed Governor, James Bullard, has broken ranks with his colleagues and argued publicly for higher interest rates saying:

The Fed cannot permanently raise stock prices (and)…its inappropriate to react to financial market turmoil.  Historically the Fed has not wanted to react to this type of stuff and has tried to lay out a policy that’s more based on growth and labor markets…There is a powerful case to be made that its time to normalise interest rates.”

This is where the sentiment reading from the Boom/Gloom Index tells a story.  It peaked back in February, and its subsequent rallies have never managed to return to this level.  In turn, the S&P 500 has since peaked, breaking down quite sharply since July for its biggest fall in points since 2011.

Bullard’s comments don’t, of course, mean that the Fed won’t change its mind again as it did in 2011.  It is highly likely to panic once again if stock markets continue to fall, and introduce more stimulus as QE4.  But for the moment, traders are in the uncomfortable position of not being quite sure that this will happen.

They also have to worry that even if the Fed does move to QE4, along with the EU and Japan, some big investors may take this as a sign of panic.  After all, real world issues such as China’s change of direction, Europe’s refugee and debt crises, and Syria’s civil war, cannot be solved by printing money and keeping interest rates low.  So maybe, just maybe, markets are about to have to relearn this fundamental fact of life.

 

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 54%
Naphtha Europe, down 52%. “Traders expect the low freight rates that recently opened up the arbitrage window to Asia to continue at least until November”
Benzene Europe, down 62%. “There have been considerable volumes of naphtha exported out of the ARA region to Asia for arrival in November, which has helped support European pricing.”
PTA China, down 44%. “ The reduced supply from plant turnarounds has not bolstered PTA prices”
HDPE US export, down 36%. “International resin prices seem to have stabilised at the current lower levels.”
¥:$, down 17%
S&P 500 stock market index, unchanged

PREVIOUS POST

1 in 5 of world population will be in New Old 55+ generation

02/10/2015

Something has clearly changed in global financial markets in recent weeks.  Not...

Learn more
NEXT POST

Printed money won't save us, nor will China

06/10/2015

Something has clearly changed in global financial markets in recent weeks.  Not...

Learn more
More posts
The End of “Business as Usual”
21/04/2019

In my interview for Real Vision earlier this month, (where the world’s most successful invest...

Read
Most businesses were nowhere near Ready for Brexit last Friday – we mustn’t make the same mistake again
14/04/2019

Thank goodness for backbench MPs and the European Union. Without their efforts, the UK would by now ...

Read
Don’t get carried away by Beijing’s stimulus
07/04/2019

Residential construction work in Qingdao, China. Government stimulus is unlikely to deliver the econ...

Read
Businesses thrilled by Brexit uncertainty: “It’s exhilarating” says small business owner
01/04/2019

With the European Commission saying that a No Deal is now “likely“, small businesses acr...

Read
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read
Companies and investors have just 30 working days left to prepare for a No Deal Brexit
17/02/2019

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the...

Read
The BoE’s pre-emptive strike is not without risk
12/02/2019

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more