First published: Financial Times, 25/08/2009
The purple patch for financial markets has rolled on almost without interruption since early March, but is the tint about to change towards a more “reddish” colour?
If we were emerging from a typical recession, this would be of peripheral concern. The real issue for investors is that even though the recession probably ended in June or July, there is nothing typical about it, or its causes, or aftermath. Higher volatility seems a given, but there is little confidence in the directional bias of markets. This is not about valuations, but about liquidity, deleveraging, and economic fundamentals.
The credit crunch has clearly abated and liquidity conditions have improved significantly. Indeed, benign liquidity conditions are set to continue in the face of what policymakers still see as a very fragile recovery. The Bank of England increased and extended quantitative easing at its August meeting. The Federal Reserve’s August meeting extended for a month but did not increase the Treasury purchase programme. This was always the junior part of QE. The decision about the far bigger, $1,450bn programme of agency and agency mortgage-backed security purchases will be made late this year.
The Fed, Bank of England and ECB may begin…more