Mar­ket calm may be short-lived

The Pak Banker - - OPINION - Mo­hamed A. El-Erian

LAST week, global equity in­vestors got a much-needed re­prieve from volatile, loss-in­flict­ing mar­kets. But rather than sig­nal­ing the start of a calmer mar­ket phase, this may well prove a pre­lude to re­newed­volatil­ity in the weeks ahead. Af­ter end­ing the last trad­ing ses­sion of the pre­vi­ous week with a gain, global stocks got off to a good start last Mon­day. U.S. mar­kets went on to post their best weekly per­for­mance since Novem­ber, as two days of solid mar­ket ral­lies were fol­lowed by rel­a­tively calm con­sol­i­da­tion. Mar­kets in Ja­pan and some parts of Europe did even bet­ter, reg­is­ter­ing gains of 5 per­cent to 7 per­cent. The Fed Lifts Off There were four rea­sons for this respite from an oth­er­wise hor­rid start to the year: At­tempts by cen­tral bankers, es­pe­cially out­side the U.S., to re­as­sure mar­kets; stepped-up ne­go­ti­a­tions among oil pro­duc­ers aimed at sta­bi­liz­ing prices; the rush by Euro­pean banks to avoid join­ing the set of un­hinged mar­ket seg­ments by com­ing up with mea­sures in­clud­ing re­pur­chases of their se­cu­ri­ties; and some, al­beit lim­ited, pos­i­tive U.S. eco­nomic news. Yet none of th­ese fac­tors serve to sig­nif­i­cantly counter, let alone, over­come three much big­ger and more con­se­quen­tial re­al­i­ties. First, cor­po­rate earn­ings will be fur­ther chal­lenged by con­tin­ued signs of spread­ing global eco­nomic weak­ness and a per­sis­tent in­abil­ity by gov­ern­ments to de­liver the re­quired pol­icy re­sponses. Last week, the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment joined other in­ter­na­tional eco­nomic watch­dogs in of­fer­ing lower growth fore­casts. It also noted ad­di­tional risks.

Se­cond, the con­tin­ued abil­ity of cen­tral banks to re­press fi­nan­cial volatil­ity is in­creas­ingly in doubt. The in­sti­tu­tions that are will­ing to pur­sue such poli­cies, par­tic­u­larly in China and Ja­pan, are fac­ing ques­tions about their ef­fec­tive­ness. And more able cen­tral banks, such as the Fed­eral Re­serve, may not be as will­ing to do so, par­tic­u­larly given eco­nomic in­di­ca­tors sug­gest­ing that fi­nan­cial volatil­ity has not con­tam­i­nated eco­nomic ac­tiv­ity and that wage and price in­fla­tion are start­ing to pick up. Third, al­though a few days of mar­ket gains can force traders to cover their shorts, in this case, it does not seem to have trig­gered the re­turn of the sta­bi­liz­ing role of long-term cap­i­tal. In­stead, it would ap­pear from data about the flow of funds that mar­kets still need to reprice con­sid­er­ably lower to find the an­chor­ing in­flow of sig­nif­i­cant pa­tient cap­i­tal. Un­til th­ese three fac­tors change, oc­ca­sional pe­ri­ods of mar­ket calm -- and, thank­fully, there will be some -- are likely to prove frus­trat­ingly short.

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