Many traders and investors had come to think of the post-GFC world as one in which the strength of the hand of the Fed and other central banks was such that they could wave a monetary wand and fix all ills.
It worked in 2009. It subsequently worked with the various QE programs in the US. It’s worked in Japan, along with a good dose of currency debasement. It worked in the UK and, more recently it even worked for the ECB with Mario Draghi’s “whatever it takes” comments and more recently the ECB QE salving all wounds European.
Just like authorities in Shanghai, currently desperate to wash out downside volatility in a market whose bubble has burst, Central banks have used monetary policy to prop up markets to give a chance for the real economy to heal.
But as John Hussman highlighted earlier today, “While extraordinary monetary interventions across the globe have certainly distorted the financial markets, they have done little to support the real economy, and developing economic weakness in the U.S. and abroad is beginning to clarify that ineffectiveness.”
The recognition that this might be so is now apparent to traders and investors alike.
So in Asia today we have acute weakness in stocks across the region, further big falls in commodity prices – especially oil which is currently trading at $39.47 for the front Nymex contract, and in Asia linked forex markets with the Aussie under pressure and the Yen attracting solid bids.
US futures are lower as well with the S&P 500 futures down 2.4% at the moment during Asia trade.
It is in no uncertain terms a major market meltdown.
Even before today US markets were down around 6-7% last week, the Shanghai composite lost 12% before todays 8%+ fall. That’s a bear market in just a few days. And the DAX in Europe has been slowly crashing for a couple of weeks.
The question for traders is whether this a Monday morning Asia head fake, and the type of pessimistic crescendo markets sometimes need, or the start of something bigger.