Macroscope | Why the stock market rally will not last long, despite dovish moves by central banks

While recent stock market gains are rooted in confidence that central banks will ease monetary policy, investors are not moving into assets that profit from stronger growth. This indicates a lack of faith in the effectiveness of more stimulus

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A traders works on the floor of the New York Stock Exchange on July 8. Stocks have bounced back spectacularly from their slump in late 2018. Photo: AFP

Published: 3:00am, 12 Jul 2019Updated: 4:38am, 12 Jul 2019

Few would have predicted at the end of last year, when stock markets were in free fall, that global equities would bounce back so spectacularly.

In the first half of 2019, the MSCI All-Country World Index, a leading gauge of shares in developed and developing economies, surged almost 15 per cent, its best first half since 1997. The fierce rally has left the index just 4.5 per cent shy of its all-time high reached in January last year.

The dramatic gains in stock prices stem mainly from the outbreak of dovishnesss among the world’s leading central banks, led by the Federal Reserve, which unexpectedly put its interest rate-hiking campaign on hold in January, and is now widely expected to begin cutting rates as an insurance policy to help sustain America’s economic expansion.

What is more, the rally in equities is broad-based, unlike the previous gains in 2017 and parts of 2018, which were led by the US. Europe’s main stock index, the Stoxx Europe 600, shot up nearly 14 per cent in the first half of this year, buoyed by signals from the European Central Bank that it will relaunch its quantitative easing programme if the threat of deflation in the euro zone becomes more severe.

In a sign of the extent to which expectations of further monetary loosening are turbocharging this year’s rally, the yield on the two-year bond of Italy – one of the world’s most heavily indebted countries whose populist government is deeply hostile towards European integration – briefly fell into negative territory earlier this month for the first time since May 2018.

Italy’s Prime Minister Giuseppe Conte addresses the European Parliament during a debate on the future of Europe in Strasbourg, France, on February 12. The yield on Italy’s two-year bond fell into negative territory in early July. Photo: Reuters

As JPMorgan rightly noted in a report published on Friday, the recent moves in markets “owe entirely to hopes of global policy stimulus”, the driving force behind almost all the other major rallies over the past decade.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Why the stock market rally will not last long, despite dovish moves by central banks

Macroscope | Why the stock market rally will not last long, despite dovish moves by central banks