In an apparent confirmation of my conviction that the global financial markets have become extremely dependent upon central bank stimulus to support equity prices, heads of four of the world’s largest central banks stated that they would commit themselves to signalling clearly to the markets and general public what their next moves will be. Governors Kuroda of Japan and Carney of England, as well as Janet Yellen of the FOMC and Mario Draghi of the ECB, all expressed their conviction that it was crucial not to surprise the markets with policy decisions, but rather to gently inform the markets of upcoming policy decisions in order to reduce volatility. Clearly, these central bankers must be aware that the financial markets have been tremendously influenced by the trillions of dollars of stimulus the banks have pumped into the marketplace since 2009.
At this juncture, it is clear that the bankers expect the markets to be very sensitive to any significant policy changes, whether it be the FOMC’s unwinding of its balance sheet or the ECBs tapering of bond buying. The markets have become accustomed to easy lending and plentiful money, allowing for massive stock buybacks and corporate mergers. However, as the global central banks attempt to wean the markets off of this environment and to normalize their economic policies, it is abundantly clear that the bankers do not expect the markets to be strong enough to handle any significant policy shocks. To that end, Carney, Kuroda, Draghi and Yellen all committed to sending clear messages to the markets ahead of major policy changes. We’ll see just how well they can hold up the markets going forward, as geopolitical risks continue to spread. Stay tuned.