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Wednesday, September 28, 2016

Markets Headed For Stormy Months, But No Crisis

PARIS (AFP) – Markets are heading into a stormy few months after the US Fed pricked the euphoria which pushed share prices to record highs, but turbulence does not mean a return to crisis, analysts say.

After elation over Japanese efforts to stimulate the economy out of two decades of deflation and stagnation sent shares soaring in May, indices in many countries tumbled about 10 percent.

Yields on government debt have also risen and emerging markets have been hit by large capital outflows.

“What affected the markets was the announcement of the Fed. This is what triggered the volatility,” said Olivier Garnier, chief economist at Societe Generale bank.

On June 19 Federal Reserve Chairman Ben Bernanke signalled that the U.S. central bank could begin winding down its asset purchase programme and stop it altogether in mid-2014 if the U.S. economy continues to recover.

Equities markets plunged for several days before recovering some ground this week, while the yield on 10-year US Treasury bonds shot up nearly 18 percent in one week to levels above 2.5 percent unseen for two years.

“The markets don’t really know which way to go. There is uncertainty, which has a price, volatility,” said Rene Defossez at Natixis investment bank.

“The Fed has flipped a switch that will disturb the markets for a while.”

The shift in U.S. monetary policy pushed investors to reduce their higher risk investments. The rise in sovereign borrowing costs, if it continues and filters through to higher rates for mortgage and consumer loans, could also hit the recovery of the US economy.

But markets have had more to worry about than just anticipating the Fed’s actions. The slowdown in China’s economy and a credit crunch at its banks have also sparked concern among investors, as has the limping recovery in the eurozone.

Nevertheless, analysts don’t expect the current volatility to degenerate into a full-blown crisis, saying the situation is still far from the chaos of the summer of 2011 when fears of a eurozone breakup swept the markets.