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Markets are in shambles, and not just in the United States, where all three major stock indexes are down more than 20% each from their highs.
Around the world, markets are reeling from the unpredictability. Currency values are plunging. Oil and other raw materials are hammered. Fear and panic reign in the bond markets and on the stock exchanges in Frankfurt, Tokyo and Shanghai. President Joe Biden met twice last week with his economics team, which includes the Secretaries of Treasury and Commerce, for updates on rapidly changing global financial and energy markets.
“Everything is starting to take a big hit,” says Edmund Shing, global chief investment officer at BNP Paribas Wealth Management.
And there seems to be almost global agreement on who is driving all this extreme and painful volatility: central banks, with the US Federal Reserve leading the way.
It’s a major role reversal, and investors aren’t happy with it.
One of finance’s biggest brains, Mohammed El-Erian, chief economic adviser at Allianz, told CNBC on Monday that “it’s about governments and central banks as sources of volatility, rather than volatility suppressors. They add volatility”. “
Usually, the Fed and its counterparts in other countries do everything they can to calm the markets. Their goal is to keep the economy on track, or get it back on track.
But instead of putting out the economic and financial fires, according to many big investors, these stable and strong central banks are fanning them.
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Why blame central banks?
Certainly, the central bankers did not start the fires. The pandemic, a war, and many other factors have combined to create the world’s biggest economic problem: high inflation.
Now, many of these factors also cause other problems. The war in Ukraine is creating an energy crisis in Europe. Supply chain disruptions continue to plague companies with global footprints.
What Wall Street wants is clear guidance on where central banks are headed for the economy and what their plans are. But these days, they don’t understand.
“Markets had become, I think, too cushioned by central bank directives and central banks operating in an environment where they thought they could deliver it with a reasonable degree of confidence,” said Daragh Maher, head of research for the Americas at HSBC.
But after a few missteps, central banks are operating with more “humility,” as Maher puts it, and that cushion is gone.
The Fed is among several institutions that assumed this surge in inflation would be a short-lived symptom of the pandemic. Instead, it turned out to be long-lasting and insidious. And now the Fed appears much more humble about what he can and cannot do, the challenges and uncertainty he faces, and the confidence with which he can foresee.
“It’s very difficult for central banks to offer guidance, because it all depends on the data,” Maher says. “And what’s driving the data – energy prices, food prices – all of those things are really, really hard to call, as we’ve found out.”
Another catalyst for the wild swings is the strength of the US dollar, which strengthened as the Federal Reserve aggressively raised interest rates.
“We’re at a point where the US dollar is acting like a wrecking ball and hitting all financial markets very, very hard,” says Shin of BNP Paribas Wealth Management, noting that the dollar has never strengthened so quickly. that he did. this year so far.
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While a strong dollar is good for American travelers and many American businesses, it also causes a lot of pain, especially because so many transactions are made in dollars. Multinational companies headquartered in the United States, but doing business elsewhere, take a hit when they convert money they have earned in other currencies into dollars.
“A very weak currency against the dollar means that inflation rates in the UK or the eurozone are higher than they would otherwise be, because the value of the goods they import has just increased in arrow,” Shin explains.
Volatility is not the problem – inflation is
In recent months, mastering inflation appeared about as easy as slowing down a speeding Corvette skidding on an ice field with no brakes.
Yet after the Federal Reserve announced another sharp rate hike last week, its chairman, Jerome Powell, said the central bank would continue raising rates in hopes of ending high inflation, even if it plunged the country into a recession.
Like the Fed, other central banks are sticking to their guns.
This week alone, the pound and the offshore yuan hit record highs against the dollar, and the UK and China stepped in to contain the fallout.
The Bank of England has announced a new bond-buying program, and its governor has promised that he and his colleagues “will not hesitate to change interest rates as much as necessary” to do whatever he wants. needed to control inflation.
It’s the same story all over the world. The Swedish central bank has just raised interest rates, as has its Norwegian counterpart. The European Central Bank is expected to raise rates again at its next meeting.
Combine this monetary hard love with the fact that the dollar shows no signs of weakening, and it looks like uncertainty and volatility will be present in the near future.
At a conference on Wednesday, Dan Ivascyn, chief investment officer at PIMCO, a firm that manages more than $1.8 trillion in assets, said he was “reluctant to criticize the Fed and other central banks.” , for it has been such a “remarkable and challenging time.”
Right now, Ivascyn doesn’t think it would be smart to bet against them.
“We think most central banks are pretty committed to bringing inflation back to target, even if that means the risk of a significant downturn in the economy,” he said.