Global Rebound Euphoria tests central bankers’ nerves on risk


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As the world barely goes through the worst of an unprecedented crisis, central bankers are already wondering if the next one is imminent.

From Washington to Frankfurt, what started months ago as a whisper of concern has turned into a chorus as officials question whether a risk-taking frenzy in multiple asset markets could portend a rout. destabilizing that could derail the global recovery.

Last week the The European Central Bank and the Bank of Canada have reported growing threats, aware of the downturn during the 2008 financial crisis. Meanwhile, Bitcoin’s dramatic swings after a cryptocurrency warning from the People’s Bank of China showed how sensitive certain markets have become.

European Central Bank Vice President Luis de Guindos discusses the economic outlook for the euro area, valuations of crypto assets and monetary policy with Paul Gordon of Bloomberg.

Pessimists of global monetary institutions can find bubbles almost anywhere they look, from stocks to real estate, while officials such as Federal Reserve Chief Jerome Powell argue that all threats remain contained.

Central banks bear some of the blame for the fervor of financial markets after huge doses of stimulus and liquidity injections to keep economies afloat. The resulting dynamism is at least in part a euphoric effect, applauding a pullback in growth the magnitude of which can only be guessed at – with possible repercussions judged to range from a mild boom to an inflationary spiral.

“Where we see more exuberance is around growth expectations,” Max Kettner, strategist at HSBC Holdings Plc, told Bloomberg Television. “Particularly in the United States, they’ve been brought up to an enormous degree. So there you have it, I think, the exuberance.

Market speculation has led to high volatility of late, including wild gyrations and declines in Bitcoin from an all-time high above $ 60,000 in April. More traditional assets are also struggling, with rates on German safe-haven bonds, for example, climbing around 50 basis points this year, approaching the break-in. positive territory for the first time in over two years.

Bunds approach in positive territory

Kettner’s mention of “exuberance” followed the European Central Bank’s use of similar words on Wednesday, echoing former Fed Chairman Alan Greenspan’s 1996 observation of a ” irrational exuberance ”before the dotcom bubble.

the eurozone The institution observed the threat of economic fallout resulting, for example, from a correction in the US stock market. Bank of Canada officials expressed similar concerns a day later, and pointed to the housing market as continued price expectations increase fuel purchases.

Max Kettner, multi-asset strategist at HSBC, discusses the European Central Bank’s warning about market exuberance on “Bloomberg Surveillance Early Edition”.

Three weeks earlier, a Fed policy meeting turned into a stability debate, where attendees observed a “high” risk appetite and discussed the dangers posed by hedge fund activity. In a suite report, they warned of “vulnerabilities” and “stretched valuations,” exacerbated by high corporate leverage.

Meanwhile, Bank of England Governor Andrew Bailey recently wondered aloud if speculation in stocks and Bitcoin could itself be a ‘warning sign’. And a Norwegian official said that cryptocurrency volatility could threaten lenders if their exposures continue to rise.

Central banks have had lingering concerns for some time. Already in January, Isabel Schnabel, head of markets at the ECB, told her colleagues that stocks could become vulnerable to a “wider revaluation”.

In China, with a recovery cycle more advanced than that of the United States, the main banking regulator revealed in March that it was “Very worried” about bubbles, specifying real estate investment “very dangerous”.

Anger bubble

Recent comments on financial stability
  • “With investors eager to expect a strong rebound, it is important to closely monitor the risks to the system.” – Lael Brainard, Fed Governor, May 6
  • “The pandemic will leave a legacy of higher debt and weaker balance sheets, which – if left unresolved – could lead to sharp market corrections.” – Luis de Guindos, Vice-President of the ECB, May 19
  • “A rapid change in market sentiment – perhaps due to a setback in efforts to end the pandemic or a stalled economic recovery – could lead to a sharp revaluation in prices.” – Tiff Macklem, Governor of the Bank of Canada, May 20

Part of it could be this UBS AG CEO Ralph Hamers had his own alarming point in mind at the end of April. Noting “bubbles in certain asset classes,” including real estate, he told Bloomberg Television that “we are getting closer to the top.

Some big central bankers are trying to be optimistic despite the flashing warning lights. After the Fed’s decision in April, Powell insisted that “the overall financial stability picture is mixed but overall it is manageable.

ECB Vice-President Luis De Guindos – whose job it is to prepare the threat assessment of his institution – returned from his worried tone of last week by saying that the economic risks are “much more balanced than in the past”.

The difficulty for central banks is to manage the consequences on asset prices of their monetary policies, a challenge that has plagued them since the 2008 calamity. Periodically, this makes institutions like the Fed the target of criticism.

“Central banks are desperate for insurance, for being certain,” said James Athey, chief investment officer at Aberdeen Asset Management Plc. “It also means that they are keeping politics too easy for too long.”

The alternative that civil servants face is to dare to cut stimulus measures, running the risk of stifling an economic recovery at a cost commensurate with livelihoods.

Iceland took the plunge last week, delivering the first policy tightening in Western Europe with rising interest rates to contain inflation and a rampant housing market.

Tariff hike in Iceland

Central bank raises benchmark for first time since 2018

Source: Bloomberg

The greater eurozone, whose constituent regions vary from some of the world’s most prosperous to examples of perpetual unrest, cannot be so nimble. This is why the ECB recommends “more targeted” tax support for companies while avoiding the withdrawal of the stimulus.

Likewise, the Fed cited the use of macroprudential tools as important to allow monetary policy to take its course. JPMorgan economists wrote this month that they expect Australia’s banking regulator to “formalize” restrictions on debt and income lending soon.

However central banks and financial regulators react to the hustle and bustle, they know the stakes are higher than ever, with the need to cement a rebound from a severe crisis in a world that will struggle to survive. tolerate another.

At least, managers can be reassured to recognize a more familiar pre-pandemic environment: the last time their concerns about risk were so synchronized November 2019, just weeks before the coronavirus began to cripple the global economy.

– With the help of Rich Miller, Craig Torres, Paul Gordon, Manus Cranny, Matthew Miller, Francine Lacqua and John Ainger

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