Analysts at ANZ explained that the past two months have been a remarkably stable period for markets, but the past few days have seen that tranquillity disrupted, with volatility spiking and risk appetite dented. Granted, moves haven’t been extraordinary, at least not on the scale of the some of the trading days we’ve experienced in the post-GFC world.
“Nevertheless, it is only natural when these bouts of volatility occur to ask “what has changed?” In many ways, not a great deal. Global growth is generally still lacklustre, inflation is still low and the debate over Fed policy rages on (still!). But the one thing that does appear to be getting more airtime of late is a view that perhaps central banks are closer to exhausting their toolkits. But even then, that shouldn’t really be a surprise.”
“The IMF, BIS, and some central banks themselves have been talking about this for some time now. Perhaps it is the fact that markets have actually seen the ECB and BoJ show a little more hesitancy to deliver more easing recently that has got them nervous? Whatever the case, recent price action shows how unhealthy a market obsessed with central bank liquidity can be. Will this tantrum continue? Who knows? If past behaviour holds, then central banks will just cave in and attempt to settle things by providing more of the liquidity sugar pill (and we were interested to read unconfirmed reports from the Nikkei overnight that the BoJ is set to explore delving deeper into negative rates). But it certainly doesn’t feel sustainable. And when markets are not really being driven by fundamentals, like they arguably aren’t at present, ‘animal spirits’ can take over.”