Markets vainly seek safety in numbers
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A well-built boat will stay on an even keel as long as its passengers do not all flock to one side. Markets are similarly self-stabilising.
In normal times prices ripple around stable trends to match the supply and demand positions market participants wish to take. The problems occur when they all clump together to do the same thing – whether it is buying houses or dumping bank assets.
There has been a lot of clumping recently: the money herd is shifting alarmingly towards the side marked “risk off”. Prices are tipping accordingly. Conventional havens are gaining. The yen has reached such highs that Tokyo is dropping heavy hints of intervention – so far unheeded by markets.
Across the world economy, summer blues have gripped equities, which have experienced a month of sluggish sinking. Bond markets, meanwhile, show signs of what on the face of it is a surreal phenomenon: a pessimistic bubble. US 10-year yields, at 2.6 per cent, have not been this low since the beginning of last year. Bund and gilt yields are at their lowest ever: investors are now extending 10-year loans to the German and UK governments at 2.2 and 2.9 per cent respectively. Say what you will about sovereign debt, it is still the safety investment of choice.
Investors are hardly paranoid: in the US, there has been no shortage of depressing data recently. The housing market’s cold turkey after a housebuyer’s subsidy expired in April was brutal. On Friday, second-quarter US growth figures were revised down to a piddling 1.6 per cent annualised rate.
Yet there is plenty of good news for those who want to believe that the recovery is safe. The European Union, a bigger economy than the US, grew more than twice as fast as the US; the UK three times as fast. Business confidence in core Europe is strong. But as investors huddle together, global financial markets have opted to take their cue from US gloom rather than EU sprightliness.
It is hard to be a monetary policymaker in such conditions. At its last policy meeting two weeks ago the US Federal Reserve showed its mildly expansionary attitude by pre-empting the de facto tightening of letting securities on its balance sheet be redeemed without reinvestment. But to the Fed’s surprise, investors were spooked, not stimulated by the decision.
So Fed chairman Ben Bernanke’s vapid speech on Friday may just reflect the little he can do beyond not rocking the boat. Meanwhile, investors must remember there is not always safety in numbers.
source ft.com
