For years now, global stock prices have been on a steady incline because so many central banks have been injecting liquidity into financial systems through unusually loose policies.
Now, however, these liquidity injections seem to be losing their effect. If this dynamic further takes hold, monetary authorities will have no tools left to cope with risk.
China’s additional easing is meant to boost the country’s macroeconomy. Whether it also supports stock prices is another matter, Nikkei reported.
In the US, the Federal Reserve has been maintaining a zero interest rate policy but has been widely expected to raise rates sometime this year. More stock market turmoil, however, could not only delay such a move, it could even prompt the Fed to begin its fourth round of quantitative easing. In other words, more liquidity injections into the financial system.
This week has brought much speculation that the Fed will be forced at least to delay hiking interest rates until 2016.
Shortly after China late Tuesday announced additional monetary easing measures, US stocks opened trading with a bang, with the Dow Jones Industrial Average advancing more than 300 points from Monday’s close. Market players there breathed a sigh in relief.
A momentary sigh of relief, as it turned out. New York stock prices began to fall one hour before closing. When trading closed, the Dow was down 204 points, a greater shock than the previous day, when the gauge lost 588 points.
When markets began to crash anew last week, sentiment had a lot to do with it. Investors are growing skeptical of price levels and of monetary authorities’ ability to stoke them even higher by continually flooding their economies with liquidity , like China did after trading closed there on Tuesday.
