6/25/13 – Central Banks to Market: “We Are Still Behind You!”

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jun 25, 2013 7:16:12 AM

and tagged Debt Crisis

Leave a comment

The volatility continues, with another decline yesterday in stock markets worldwide. And yet, in the U.S. at least, after a large drop at the open, markets slowly recovered through most of the afternoon before slipping again at the close. For today, most markets are in the green, and U.S. market futures are up as I write this.

I would argue that this is all part of a normal adjustment process, but there’s no denying that the market turbulence has eased as central banks around the world have renewed their public commitment to support economies and markets. Yesterday, two Fed presidents were quoted as saying that monetary policy would continue to be stimulative. Richard Fisher, a hawk, and Narayana Kocherlakota, a dove, both emphasized that a Fed exit from the markets won’t be on the table any time soon. Because they represent both ideological wings of the Fed, and both will be voting members next year, their opinions carry weight—and should help to reassure the markets.

The People’s Bank of China also weighed in with support for its banking system and a statement that it would keep rates at a “reasonable” level—interpreted to mean that the central bank would not allow more turbulence in the Chinese banking system. Central bankers in Europe and the UK also weighed in, with the head of the Bank of England saying, “The idea we are about to return to normal levels of interest rates is premature.” Can’t get much more explicit than that, and the European Central Bank indicated the same. Both the Bank of England and ECB are, in fact, rumored to be more likely to increase stimulus measures than decrease them.

Rates are still creeping up overall this morning in U.S. trading, but they are showing more volatility to the downside. In premarket trading, the 10-year Treasury note was trading at yields below yesterday’s. While it continues to tick above and below yesterday’s close, there is at least a suggestion that the market may be beginning to settle.

At the end of the day, the Fed’s announcement actually didn’t change anything—it just signaled an eventual slow pullback when the economy had improved sufficiently, which was inevitable. The statements by Fisher and Kocherlakota were designed to emphasize that, and there are preliminary indicators that the message may be getting through. The action by the PBOC has also reassured markets that, even as central banks discuss pullbacks, they haven’t abandoned their role as economic stabilizers.

At the same time, while central banks emphasize that support will continue, the real economy in the U.S. continues to improve. House prices continue to rise at an increasing rate, durable and capital goods sales continue to grow, and employment continues to increase. Despite the effects of the federal spending sequester, which are peaking right around now, the real economy continues to be healthy.

More volatility in the financial markets is certainly likely, even probable, but the renewed public commitment to stimulus, combined with the continued growth of the real economy, suggests there’s no fundamental reason that it should be a systemic problem. We will continue to watch the situation closely, but, at this point, it looks like a normal correction.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®