Banks

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Economy

Draghi: Eurozone will decline without vital productivity growth

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Capital Markets

Investors might not believe in the recovery


Posted on February 29, 2012

Markets used to watch for the twitching eyebrows of the governor of the Bank of England. The hold of the US Federal Reserve over investors is even more awe-inspiring.

On Wednesday the European Central Bank lent more than half a trillion euros to the region’s financiers. Then Ben Bernanke, Fed chairman, quite literally said nothing – failing to mention more quantitative easing in testimony to the US Congress – and it turned out the ECB barely mattered to global asset prices.

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The dollar jumped, equities gave up all their gains for the day, Treasury bond yields rose and gold and silver plunged. Investors abandoned hopes of a perfect outcome: improving economic growth combined with more monetary easing. The world can have a stronger US economy or a flood of dollars, but not both.

The market reaction seems excessive. Anyone who has listened to the Fed must have expected an improved economy would mean QE3 would at least be delayed. If the recovery once again turns sour, QE3 will surely be back.

Yet the way markets moved is informative. Investors care more about the odds of more money being printed than they do about a stronger economy.

This might simply be down to a reliance on ever-cheaper money to inflate asset prices.

Equally plausible is that investors do not really believe in the recovery, and so are relying on more easy money to keep the economy ticking over. After all, growth forecasts remain subdued and profit predictions, while falling less quickly, are still coming down. Across the Atlantic, almost everyone believes another Greek crisis has merely been deferred. Spain and Italy are far from fixed, and Portugal continues to teeter.

We may be back to a time, as in mid-2010, when weak US economic data had the opposite effect one might expect. Worse than expected figures could prompt a rise in equities, and fall in the dollar, by putting QE3 back into play.