Markets to policymakers: Do something!

Markets to policymakers: Do something!

Central banks and governments seem unable to spread the feel-good factor.

By FRANCESCO GUERRERA 1/21/16, 8:20 PM CET Updated 1/21/16, 8:44 PM CET

http://www.politico.eu/article/markets-to-policymakers-do-something-european-central-bank-ecb-stock-draghi-imf-2016/

LONDON — Tumbling global markets are issuing a cry for help to policymakers of all stripes: Do something.

As investors, traders and pundits scramble to understand the reasons for the terrible start to 2016, more and more are looking at central banks and politicians to restore the swagger of years gone by.

Mario Draghi, not for the first time, obliged. The president of the European Central Bank on Thursday said the ECB would review its policy stance at its next meeting. The phrase — widely interpreted as a sign that more stimulus might be unleashed — cheered European stocks, which rebounded after Wednesday’s sharp losses.

Sustaining that positive mood will be easier said than done. After years of unprecedented monetary intervention, major central banks are stressing that there isn’t that much more they can do, while governments seem unwilling or unable to spread the elusive “feel-good factor” among their citizens.

“There is a lot of uncertainty out there” — Andrea Orcel, UBS.

That, in turn, fuels uncertainty, making it difficult for companies to plan their investments, consumers to spend and investors to move away from ultra-safe assets like U.S. government bonds.

“The markets … have lost confidence. There is a lot of uncertainty out there,” Andrea Orcel, the head of investment banking for UBS, told Bloomberg Television on Thursday at the World Economic Forum in Davos.

As bourses from Shanghai to London and New York notched up ever-grimmer milestones, the hunt has been on to find the real catalyst for the unhappy New Year. The mystified mood was summed up by Martin Gilbert, chief executive of Aberdeen Asset Management, one of the world’s largest investors.

“We’ve got off to a difficult start, and it’s very difficult to really explain why, because nothing really seems to have changed since the end of last year,” Gilbert told CNBC on Thursday amid the snow-capped Swiss Alps.

Job fears

Unlike previous periods of turmoil, this one has not been sparked by a sudden deterioration in the world economic outlook.

Sure, public bodies like the International Monetary Fund and private firms like Royal Bank of Scotland, not to mention the dignitaries at the Davos jamboree, have sounded warnings over global economic growth this year. But none of the reasons cited — a China slowdown, a stuttering U.S. recovery, a glacial pace of European growth — are particularly new or shocking enough to justify the current market conniptions.

Neither does a financial crisis look imminent, at least judging by the health of banks following the tighter rules imposed since the troubles of 2008. “We have three times more capital than in 2006,” said a London-based banking chief. “We can withstand a lot more.”

In fact, some recent market developments, such as the sharp fall in the price of oil, are actually positive for consumers and companies, who can pocket substantial savings as a result of crude’s crash.

But individuals and firms are feeling anything but flush.

On Wednesday, a survey by the data company Markit showed that British households’ financial situation had worsened in January to the weakest in five months.

“Underpinning financial woes were worries about job security, slower growth of workplace activity and faster reductions in savings and cash available to spend,” said Philip Leake, Markit’s economist. “All of these factors meant that the 12-month outlook for finances remained downbeat.”

Rates near zero

In the recent past, the antidote to this negativity had been found in political and financial capitals. When the markets and the economies felt blue, central banks had reliably come to the rescue with ultra-low interest rates, ample supplies of cash and other measures designed to grease the wheels of commerce.

“If we have another bad shock, what are policymakers going to do?” — John Van Reenen, LSE.

This time, however, the room for maneuver for the ECB, the U.S. Federal Reserve and their brethren may be limited. The Fed has already started raising rates and it is unlikely to change course unless there is a major problem. The ECB has not followed its American counterpart on the rate-hiking path but its recent stimulus left markets unimpressed.

In December, Draghi did not live up to his moniker of Super Mario when he unveiled a series of technical measures that fell short of what investors expected.

It is unclear whether he will have more success if the ECB does decide to inject more stimulus in coming months.

“If we have another bad shock, what are policymakers going to do? Interest rates are already near zero,” said John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. He points to investor fears of a prolonged slowdown in economic growth as the key “fear factor” coursing through the markets.

UBS’ Orcel had a more poetic explanation. “We’re all driving through a fog,” he said. Until it clears, markets are likely to be buffeted by more volatility.

Authors:

Francesco Guerrera