Destabilizing speculation

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Global rebound euphoria tests central bankers’ nerves for risk

(Bloomberg) – As the world barely goes through the worst of an unprecedented crisis, central bankers are already wondering if the next one is imminent. From Washington to Frankfurt, what started months ago as a whisper of concern has turned into a chorus as officials ask whether a risk-taking frenzy in multiple asset markets could portend a destabilizing rout that could derail the global recovery. financial crisis. Meanwhile, Bitcoin’s dramatic swings after a cryptocurrency warning from the People’s Bank of China showed just how sensitive some markets have become. Powell maintains that all threats remain contained: central banks bear some responsibility for the fervor of financial markets after huge doses of stimulus and injections of liquidity to keep economies afloat. The resulting dynamism is at least in part a euphoric effect, applauding a rapid return to growth the magnitude of which can only be guessed at – with possible repercussions deemed to range from a mild boom to an inflationary spiral. expectations, ”Max Kettner, strategist at HSBC Holdings Plc, told Bloomberg Television. “Particularly in the United States, they’ve been brought up to an enormous degree. So it is, I think, exuberance. Market speculation has led to high volatility lately, including wild gyrations and declines in Bitcoin from an all-time high above $ 60,000 in April. More traditional assets are also struggling, with rates on German safe-haven bonds, for example, climbing around 50 basis points this year, closing in on entering positive territory for the first time in more than two years. The European Central Bank used similar words on Wednesday, echoing former Fed Chairman Alan Greenspan’s 1996 observation of “irrational exuberance” before the dot-com bubble. The Eurozone institution observed the threat of economic fallout from, for example, a correction in the US stock market. Bank of Canada officials expressed similar concerns a day later and pointed out that the housing market expected continued price increases to fuel purchases. Three weeks earlier, a Fed policy meeting turned to a stability debate, where attendees observed a “high” risk appetite and discussed dangers posed by hedge fund activity. In a subsequent report, they warned of “vulnerabilities” and “stretched valuations,” exacerbated by high corporate debt. Meanwhile, Bank of England Governor Andrew Bailey recently wondered aloud whether stock speculation and Bitcoin themselves could be a ‘warning signal’. And a Norwegian official said the volatility of the cryptocurrency could threaten lenders if their exposures continue to rise. Central banks have had nagging concerns for some time. Already in January, ECB market chief Isabel Schnabel told her colleagues that stocks could become vulnerable to a “wider price revaluation”. In China, with a recovery cycle more advanced than that of the United States, the main banking regulator revealed in March that it was “very worried” about bubbles, specifying real estate investments “very dangerous”. This is perhaps in part what UBS AG Managing Director Ralph Hamers had in mind at the end of April with his own alarming point of view. Noting “bubbles in certain asset classes” including real estate, he told Bloomberg Television that “we are getting closer to the top of the game.” Some senior central bankers are trying to be optimistic despite the flashing lights. After the Fed’s decision in April, Powell insisted that “the overall picture of financial stability is mixed but overall it is manageable.” by saying that the economic risks are “much more balanced than in the past”. The difficulty for central banks is to manage the consequences on asset prices of their monetary policies, a challenge that has plagued them since the calamity of 2008. Periodically, this makes institutions such as the Fed the target of criticism. “Central banks are desperate for insurance, for certainty,” said James Athey, chief investment officer at Aberdeen Asset Management Plc. “It also means that they are keeping politics way too easy for far too long.” The alternative for those in charge is to dare to reduce stimulus measures, taking the risk of stifling an economic recovery with a corresponding cost to livelihoods. Iceland took the plunge last week, achieving the first political tightening in Western Europe with rising interest rates to contain inflation and a galloping real estate market. The larger euro area, whose constituent regions vary from some of the most prosperous in the world to examples of ongoing unrest, cannot be so nimble. This is why the ECB recommends “more targeted” budget support for businesses while avoiding the withdrawal of stimulus measures. Likewise, the Fed cited the use of macroprudential tools as important to allow monetary policy to take its course. JPMorgan economists wrote this month that they expect Australia’s banking regulator to “formalize” restrictions on debt and income lending soon. a rebound from a severe crisis in a world that will struggle to tolerate another.At least officials can take comfort in acknowledging a more familiar pre-pandemic environment: The last time their concerns about risk were so synchronized, that was in November 2019, just weeks before the coronavirus started crippling the global economy.More stories like this are available at bloomberg.comSubscribe now to stay ahead with the news source most trusted trading. © 2021 Bloomberg LP

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