How Do You Like Them Apples?
(With apologies to Good Will Hunting)
Financial Markets have become "addicted" to low interest rates and central bank monetary stimulus.
That prompted Janet Yellen to suggest that "holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability" in yesterdays speech on "The Economic Outlook and Monetary Policy" to the Economic Cub of Washington in Washington, D.C. yesterday.
Well, equity markets did not like that one. Basically, equity markets have been in denial of their "addiction" (in other words low interest rates trump fundamentals).
We, on the other hand (for a long while now) have continued to stress fundamentals, while recommending that investors best guard against getting drawn in to chasing higher returns at the expense of taking greater risk.
Further evidence of this "addiction" can be seen in the reaction to the less than expected stimulus by the European Central Bank this morning.
Both equity markets and bond markets are in turmoil and as we have suggested many times in the past, the uncertainty will drive volatility higher.
Cash is a defensive asset and those traders / investors who have been taking increasing amounts of risk are now vulnerable and will likely move out of (selling) those riskier assets and into cash and (buying) safer assets.
The good news: is that Ms. Yellen, Mr. Draghi and Mr. Poloz (Bank of Canada) sounded rather upbeat in their respective commentary over the last couple of days about the long-term prospects for their respective economies.
More tomorrow as we see how these markets adjust technically and give us some indication of the short-term picture.
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