Markets’ addiction to central bank support leaves investors stunned
By Valentijn van Nieuwenhuijzen, head Multi-Asset at NN Investment Partners (NN IP)
Markets have become increasingly volatile this year and seem to be much more driven by investor sentiment rather than economic fundamentals. In the past years, markets have developed an addiction to central bank support and their reaction to changes in monetary policy stances has become unpredictable and often dramatic.
This year we saw a couple of good examples. On August 24, or “Black Monday”, Chinese equity markets dropped nearly 9% in one day followed, by the news that China’s central bank was not quickly planning to bail out markets again after already pledging hundreds of billions of dollars for this purpose earlier.
Naturally this sent ripples throughout global markets, including Europe and the US. On Black Monday, the Dow Jones dropped 1,000 points at opening, the largest drop ever.
The latest example is from December 3, the day that ECB President Mario Draghi announced additional stimulus measures in order to boost the eurozone economy and inflation. Markets had created the image of “Super Mario”, the central banker who has proven to be able to overachieve the market’s already high expectations.
In September and October, Draghi had hinted at QE2, an extension of the ECB’s bond buying program, partly as an answer to China’s woes potentially threatening the eurozone economy. Markets had therefore been anticipating a substantial additional stimulus package at the central bank’s December meeting, Draghi’s status in mind.
Super Mario however managed to underachieve this time and delivered less than the market consensus had expected. The market reaction therefore was one of declining stock markets, a spike in the euro exchange rate and, most notably, a sharp rise in government bond yields.