Markets Hitting Record Highs Following Global Central Banks Easing Signals
Huge recent changes in world politics and financial institution policies are shaking up the global economy. The United Kingdom’s decision to leave the European Union, a move dubbed Brexit, has rocked share prices as the value of the pound against the dollar experiences dramatic dips and peaks. The Bank of Japan implemented a risky policy earlier in the year offering negative interest rates.
In the wake of these sweeping geopolitical shakeups, the leading central banks in major financial centers around the world are seeking to steady a volatile market that could easily and swiftly shift the global economy. Central banks have been highly accommodative as they consider the varied impact of easing policies in an attempt to rebuild the economy.
Central Banks Implement Unprecedented Easing Policies
Central banks have explored unprecedented intervention strategies to jumpstart their local economies, ranging from zero interest rate policies to forward guidance. Many world superpowers, including Japan and the U.S., have also adopted quantitative easing strategies. This unconventional monetary program has central banks buying government bonds and open market securities to lower interest rates and increase money supply. The hope is that by pumping cash into the economy, companies and consumers will feel more confident in spending and investing capital.
As news of the EU referendum broke, the world’s largest central banks stood ready to make their biggest moves yet to calm the markets. The Bank of England pledged $347 billion along with a substantial amount of foreign currency liquidity, the European Central Bank implemented a quantitative easing program to purchase assets and the Swiss National Bank actively intervened to weaken the franc. Major Asian central banks in Korea, India and Japan all sold dollars to curb the fall of their country’s currencies. All entities have publicly stated that they are “ready to take additional measures if needed,” reports Reuters.
Noting that “there is only so much quantitative easing and rate fixes they can do,” Gulf News Analysis advocates for central banks to take “drastic steps to stoke inflation and growth.” However, with such a major influence over market pricings and behaviors, collectively the global central banks could unintentionally undermine fair value calculations. For now, the major central banks are proceeding with caution in reviewing potential rate hikes or further easing monetary policies.
Economic Markets Experience Steady Climbs
The fragility that has reigned over the post-recession market these past seven years appears to be steadily growing in confidence. The efforts of the central banks also seem to be helping as global stocks achieved 2016 highs in mid-July. According to a report in The Stock Market Today, the FTSE All-World Index had its best close since November at 271.98. Over the last two weeks, it has now climbed to 272.79. The S&P 500, pan-European Stoxx 600 index, London’s FTSE 100, Australia’s S&P/ASX 200 and Hong Kong’s Hang Seng index have all experienced recent gains.
Even market currencies that have been hit hard by recent developments, such as the failed coup in Turkey, are rallying with notable rebounds. The value of currency is also increasing with the euro, UK pound and U.S. and Australian dollar all experiencing recent gains. With U.S. equity prices sitting at near record highs, Barron’s asserts that the market seems to be “impervious to bad news.” The economy’s slow-growth pace is actually a strength to the equity markets as gains in corporate earnings march forward in a positive direction, the article states.
Keeping an Eye on the “Giddy Market”
Brexit rocked more than the European Union. The historical move set off a chain reaction in the increasingly interconnected global central bank policy. The Wall Street Journal called the future “a new phase in the global central bank experiment” that is pushing the federal financial institutions “deeper into the unknown of monetary policy.”
Yet two weeks ago, U.S. News and World Report labeled the economic market “giddy” as stock indexes and bond yields continue to set records during “these strange times in the world of investing” just days after “one of the costliest selloffs in years.”
Just as markets are hitting record highs, fresh monetary policy updates are on the horizon from the U.S. Federal Reserve and the Bank of Japan. Industry insiders expect changing central bank policies to remain ultra-accommodative, particularly on interest rates, to encourage the forward momentum of economic growth.