If there was one individual thing that seemed to arrest the slide in global stock prices during October’s selloff it was a comment from James Bullard, a noted Fed hawk, that maybe the Fed might delay the end to its quantitative easing program.
That one comment served to highlight the role that interest rates, and more specifically unconventional policies of central banks’ bond buying and balance sheet expansion, have played in the cycle of stock market recovery since the 2009 lows.
Locally the ASX 200 is up at 8 week highs this morning at 5,526 and IG Markets Equity Strategist Evan Lucas says that at present, “divergent central bank action still remains the largest single driver of equity markets…With the Fed now out of the market, other global central banks are picking up the slack to further depress volatility with monetary policy. Europe and Japan, in particular, will continue to be as proactive as possible to battle stagnating inflation and the elusive goal of sustained economic growth in their respective economies.”
It’s a theme that makes sense to traders and in the abstract but it is also a theme that is brought starkly into contrast by Deutsche Bank’s Equity Strategists Tim Baker and Joseph Kim who wrote in their monthly “Australian Equity Strategy Chartbook”.
Baker and Kim note:
The market has bounced from the September selloff, taking the 12m forward PE ratio back to an above-average level (14¾x). But this looks sustainable in a world with persistently low interest rates.
Ultimately this is a story of cheap money fueling gains and as any currency trader knows – cheap money drives the carry trade and wins out regardless. Unless of course it becomes scared money as we saw in October.
But who knows when that might be.
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