QE and low rates raise the mood
May 8th, 2009
Moods are important. Many market participants have switched from the fear that gripped them in February, to greed. This spring they sense they can make money again by buying and holding shares. Suddenly the 10% in cash that looked prudent two months ago is burning a hole in their pockets.
Nothing goes up in a straight line day after day, so we should expect interruptions to this new trend. There is still plenty of bad news about in the economies of the world. Equity markets may be on the mend, but manufacturing industry still wrestles with poor demand and more de-stocking.
Banks may now be able to write profitable business. There is plenty to do by way of recapitalising themselves and the rest of business, earning fees for bond and share issues. The authorities around the world are allowing them to make trading and dealing profits in government bonds, by issuing a lot and by interventions in the markets. However, a number of important banks in the USA failed their stress tests and have to raise more capital, whilst RBS and Lloyds are likely to go on losing money. Loan experience is still deteriorating on past advances.
There are record amounts of oil afloat and in stock, yet the oil price is rising. Property values and rents are still falling in the UK and the US, yet property shares are rallying.
All this implies one thing. Quantitative easing and very low interest rates are beginning to have an impact on the prices of risk assets. As intended, low interest rates force investors to seek more income by taking more risk. As planned, printing money puts more money into financial institutions, who can then buy more financial assets.
These markets are very managed and stage managed. The authorities are talking them up, because they realise there needs to be more confidence to stabilise and then turn round the economies. The future course of the markets will depend on how successful they can be in trying to talk the economies into life, and for how long they continue with easy money policies.
For the time being they are going to print more and talk more. We will be watching carefully, as moving from quantitative easing and very low rates to a more normal situation is not going to be easy. If they try to do it too soon they will reverse the asset price rises. If they leave it too late they will allow a faster inflation. We are staying with the positions we built up at lower prices.
