Most of the finger-pointing for the stock-market sell-off that started with tech stocks on Tuesday and suddenly turned into a broad rout is aimed at European Central Bank President Mario Draghi.
“Draghi’s comments in particular seem to have pushed markets over a tipping point,” wrote Alastair George, chief strategist at Edison Investment Research, though he thinks that hawkish signals from the Federal Reserve and Bank of England share responsibility.
Fed Chair Janet Yellen and Vice Chairman Stanley Fischer have been talking about “somewhat rich” asset prices in the past few days, and the Fed is expected to begin slowly scaling back its $4.5 billion balance sheet, which is bloated after asset-purchase programs meant to aid recovery from the financial crisis.
On the stock market today, the S&P 500 index bounced off its 50-day moving average, but the Nasdaq composite finished just below that key technical level, losing 1.45%. Alphabet (GOOGL) and Microsoft (MSFT) fell through their 50-day averages, while Facebook (FB) and Amazon (AMZN) once again found support near there.
The Dow Jones industrial average outperformed, slipping a moderate 0.8%, as JPMorgan Chase (JPM) and Goldman Sachs (GS) rose after the Fed signed off on their capital return plans following their stress tests. Shares of JPMorgan Chase cleared a buy point on Wednesday.
Economists and market participants interpreted Draghi’s Tuesday comments — including “the threat of deflation is gone and reflationary forces are at play” — as a signal that the ECB is preparing to scale back its asset purchases by the end of the year or early in 2018. Draghi also said that the eurozone is enjoying “above-trend” growth.
The ECB tried to walk back those comments Wednesday via anonymous sources, which helped to spur a market rebound that day, but by Thursday sentiment had returned to suspecting a shift toward the end of ECB bond-buying.
Bank of England Gov. Mark Carney also made some hawkish-sounding noises Thursday, while German inflation unexpectedly ticked higher.
The euro and pound are rallying this week, with eurozone bond yields spiking higher. Those factors are lifting U.S. Treasury yields.
“Unless an unexpected shock materializes, a formal tapering announcement is likely” at the ECB meeting in early September, wrote Marco Valli, chief eurozone economist at UniCredit Research.
Draghi may have put investors on alert for a repeat of the “taper tantrum” triggered in the spring of 2013, when then-Federal Reserve Chairman Ben Bernanke signaled that the Fed was likely to slow its asset purchases later in the year. At the time, Treasury yields spiked and the stock market went into a six-week tailspin as the Fed appeared set to pull back on asset purchases that had been supporting lower rates and higher stock prices, on and off, since the end of 2008.
IBD’S TAKE: IBD changed its market outlook to “uptrend under pressure” on Tuesday, a signal to investors to exercise extra caution in buying stocks and to take some money off the table to deploy when the turbulence subsides. Make sure to read IBD’s The Big Picture each day to get the latest on the market trend and what it means for your investments.
“The lesson from the taper tantrum is that the QE (quantitative easing) programs have had the desired effect on asset prices, suggesting that the purchases have influenced output, employment and inflation expectations in the desired direction,” wrote Christopher Neely, St. Louis Federal Reserve economist, in a post-mortem.
In other words, a reversal of QE can work in the opposite direction.
“The impact of central banks’ purchasing of government bonds in recent years on asset markets should also not be underestimated,” wrote Edison’s George.
Assets of the world’s major central banks are worth nearly $14 trillion, or more than 25% of the total value of advanced economy bond markets, he noted. Central bank investments have pushed government bond yields lower and lowered the risk premium on riskier assets such as equities, George wrote.
Unwinding those purchases “certainly is a headwind” for equity prices, George wrote, but he — unlike some other market commentators — doesn’t necessarily think it spells trouble ahead.
The real problem will be if central bankers make a policy mistake by acting too aggressively, or if inflation rises to an extent that limits monetary policy flexibility, George says. Right now, there’s no evidence of the latter.
“There is a distinction between headwinds and hurricanes; we do not believe policy error should be the base case at this stage.”
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