Why central banks will retain their decisive grip over markets
While Trump’s victory raised hopes that the economic stimulus baton is finally switching hands from central banks to governments, a ‘presidential put’ is wishful thinking
Which is more important in determining sentiment in financial markets: the actions of central banks or those of politicians?
Prior to the shock victory of Donald Trump in last November’s US presidential election, the answer was all too obvious.
As recently as September, Claudio Boro, the head of the monetary and economic department of the Bank for International Settlements (BIS), the central bankers’ bank, warned of the over-reliance of markets on the ultra-loose monetary policies of central banks, noting the “sensitivity [of investors] to central bankers’ every decision and utterance” and the risk that “central banks have been overburdened for far too long.”
Borio said it was essential that “a more balanced policy mix” emerge in which governments play a stronger role in fostering growth in the global economy.
Fast forward six months and it appears that the BIS’s concerns have been somewhat assuaged.
In its latest quarterly review published last week, the BIS noted that “politics tightened its grip on financial markets in the past quarter”, resulting in a breakdown in correlations between asset classes and a reduction in so-called “risk-on/risk-off” behaviour which has stemmed largely from investor perceptions of the conduct of monetary policy. According to Borio, “the markets’ close dependence on central banks’ utterances and actions was at least temporarily weakened during the [past] quarter.”