Saturday, September 29, 2012

Markets' addiction to central bank stimulus dominates financial headlines

Financial markets' addiction to central bank stimulus is out of control (see previous post). Below are some financial media headlines from the last few days discussing market moves - in no particular order. The news driving markets now constantly originates from central banks (or related government entities) - with earnings mixed in here and there. Central banks' actions (or inaction) are often the major factors in securities valuation. What is not clear however is if market participants and the public understand that this is not how financial markets have typically operated in the past (even though central bank actions were always a component of valuations) and is not how free markets should operate.

We go from this one day:
Reuters: - U.S. stocks rose modestly on Tuesday on investor confidence that Federal Reserve stimulus would underpin equities and purchases by money managers wanting to touch up portfolios before the quarter's end.

... to this the following day:
WSJ: - The Standard & Poor's 500-stock index dropped nine points, or 0.6%, to 1447. The Nasdaq Composite fell 29 points, or 0.9%, to 3131.

Federal Reserve Bank of Philadelphia President Charles Plosser said the U.S. central bank's new mortgage bond-buying program is unlikely to boost growth, and that the effort could harm the Fed's credibility.

"There are many investors who think the Federal Reserve was the catalyst for this latest move," said Michael Shea, managing partner with Direct Access Partners. "If you have another Fed governor dissenting with what the Fed's doing, you're going to spook some people."

And it just keeps going.

Reuters: - Mining stocks .SXPP rose 1.2 percent after China's central bank injected cash into its money markets and traders speculated it may also take steps to boost the country's weak stock market, to arrest a slowdown in its economic growth.

Reuters: - Global investors staged a tentative return to euro zone stocks and bonds this month following the European Central Bank's bond-buying rescue plan and credit easing from the U.S. and Japanese central banks, a Reuters poll showed on Thursday.
Reuters: - Traders said talk of new central bank stimulus measures from the likes of China or the Bank of England was preventing equity markets from sliding 
WSJ: - European stocks rose and the euro nudged up against the dollar Wednesday, after the Bank of Japan jumped on the stimulus bandwagon by announcing an expansion of its asset-purchase program.

The BOJ said it will increase it asset purchases to 80 trillion yen ($1.01 trillion) from Y70 trillion, just one week after the U.S. Federal Reserve announced another round of quantitative easing.
The Hindu: - After surging 250 points in anticipation of a rate cut, the Sensex on Monday closed only 78 points higher - registering 9th straight day of gains - as investors were not excited at RBI just reducing CRR by 0.25 per cent and keeping key interest rates unchanged.

And it's not just about the equity markets:
SF Gate: - The yuan climbed to its strongest level since 1993 on speculation China will step up efforts to arrest a seven-quarter slowdown in the world’s second-largest economy.

Of course like any drug, the high wears off quickly.
Bloomberg: - Asian stocks fell amid concern stimulus measures by central banks won’t be enough to boost global economic growth ...
Investors are “finally realizing that recently announced liquidity injections from central banks will do nothing to address the structural issues,” said Matthew Sherwood, Sydney- based head of markets research at Perpetual Investments, which manages about $25 billion.

Until the next fix... - The U.S. equity market next week will start the final quarter of 2012 with a heavy schedule of reports highlighting conditions in the U.S. economy, with all leading up to figures that will show if there’s been any improvement in the shaky labor market.

The action starts Monday with Federal Reserve Chairman Ben Bernanke slated to deliver a speech on monetary policy.
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