It’s time for markets to grow up.
An important element in the current volatility tantrum is the return of inflation. Last Friday’s US payroll report kicked it off, and the struggle at this week’s 10-year and 30-year US. Treasury auctions suggests fixed-income investors don’t spy an end to the rout. This means the next key event for them is US. CPI data next Wednesday, which may validate everyone’s fears that the inflation monster is at their door.
But what’s more galling to investors than faster price gains is that central banks are actually not running to their rescue at the first sign of trouble. After nearly a decade of being granted a flood of emergency support at the tiniest little scratch, now officials are daring to ask them to stand on their own two feet.
New York Fed Governor Bill Dudley called the recent shakeout “small potatoes.” This means one of the most dovish principal Fed voters sees virtually no economic implications from the market’s wails and moans, which is not terribly reassuring for investors expecting any form of official help. Another Fed rate increase at the March 21 meeting looks even more certain.
The Bank of England’s hawkish turn on Thursday compounds the felony, as now a second major central bank is on the rate hike bandwagon. That leaves the Bank of Japan and European Central Bank looking more isolated.
The withdrawal of monetary stimulus was never going to be an easy hurdle for markets to jump. But having one of the big four monetary authorities make a significant shift in its rate view for more and earlier rate rises, in the middle of a stock market correction, is unfortunate timing to say the least.
Hit to confidence
In the short term, the bad times look set to continue for fixed income. Fiscal discipline is decidedly not a feature of US tax reforms, and higher Treasury issuance is the necessary end-result — which in turn leads to higher rates. These will feed straight through to raised funding costs for companies, and the more-leveraged will suffer the most.
The longer this correction extends then the bigger the hit to confidence and the need for repricing of leveraged risk. Stock markets have seen tailwinds turn into headwinds.
The rapid unwinding of January’s parabolic rise in the Standard & Poor’s 500 Index is understandable. The question is how investors will cope with a faster end to extraordinary central bank stimulus.
In this market, if there’s pressure on bonds then it looks like the pressure on stocks should continue.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
