World Economy

Another Sell-Off in Equity Markets

Another Sell-Off in Equity Markets
Another Sell-Off in Equity Markets

The Dutch bank has long questioned the effectiveness of the European Central Bank’s approach. Germany’s Wolfgang Schaeuble is the latest to warn of risks of the ECB’s ultra-loose policy.

Recent commentary by the German federal minister of finance that the European Central Bank’s monetary policy is damaging the eurozone’s economy resonates with analysts at Rabobank. They have argued for some time that investors are increasingly questioning the effectiveness of the central bank’s policy, News.Market reported.

Schaeuble, a well-known critic of the ECB’s monetary policy, said there is a “growing understanding that excessive liquidity has become more a cause than a solution to the problem,” and that the major central banks should “carefully but slowly exit” their ultra-loose monetary policies.

This leads the Rabobank analysts to question the current lofty levels of risk assets as monetary stimulus losses its effectiveness, while there are already signs that investors are moving into less riskier assets.

The 10-year German Bund–the gold-plated safe haven in times of stress–is currently trading at near record levels and offers a wafer-thin yield of just 0.08%, which is expected to turn negative in the coming months, while the Japanese yen, another safe haven, continues to soar. At the start of the year, one US dollar would have bought you around 121 Japanese yen–now it only gets you around 108.

Coupled to these warning signs–the long-term wrangling over the Greek debt crisis, reoccurring Italian bank woes and low expectations ahead of this quarter’s US earning’s season–and the reasons to sell riskier assets mount.

Rabobank argues that the sharp sell-off in the equity markets at the start of the year “reflects the market’s loss of confidence in the post-crisis policy premise/promise that where asset valuations lead, so fundamentals will naturally follow.”

This in turn points to “a drop in equities and by the same token a widening of peripheral spreads”, the bank adds. “We say ‘by the same token’ as we argue that now monetary stimulus appears to be losing its effectiveness, peripherals are no longer subject to a ‘QE ceiling’ and are now themselves trading as equities.”

Rabobank concludes: “From a strategic perspective, this gloomy view and the recent evidence investors are no longer so happy to buy into the promise of asset values leading fundamentals sees us reticent to go long risk–at least on anything more than a tactical basis. With investor confidence in central bank policy seemingly now being challenged, we see some high probability of risky assets correcting once again and to do so sooner rather than later.”