Is the rally over?

Alex Moffatt

Good morning, if one swallow a summer does not make, then one snowflake a winter noes not either make. Markets had a thoroughly miserable session Thursday and Friday with losses being taken across the board on equities as well as in credit spreads and even underlying bond markets. Where to start? Although the drop in the Dow looks impressive - every stock other than JP Morgan and Goldman Sachs was in the red - and the collapse in both the Dax and the CAC by 1.83% and 1.88% look downright scary, it was the way in which the bonds were taken to the woodshed which really made an impact with the bund now trading at 0.45% and gilts, just a few days ago below 1.00%, back up at 1.24%. So is this the beginning of the end? Is this the first step in the long promised precipitous collapse in the price of financial assets? Right off the top, in all likelihood it isn't. What it is, is a European version of the taper tantrum. I don't beleive that anyone has a clue what's going on; the difference is that this time they're admitting it. On the back of the mixed signals coming out of both the ECB and the BoE who could blame them? Over the past 8 1/2 years the central banks have been steering the ship and if one believes that their sole purpose in life is to prevent recessions, then they have done a darned good job. They were most certainly not the drug barons but in the aftermath of the debt crisis - let us not forget that the GFC was nothing more than the bursting of a very, very large and toxic credit bubble - they turned themselves not into the managers of a detox clinic but into the providers of near endless supplies of Methadone. The economies of the world, represented by consumers, have paid homage to them and few of us denied that when politicians failed to act decisively during the darkest days of the crisis, the central bankers took over. However, as much as power corrupts, so absolute power corrupts absolutely so by being able to loose endless amounts of cash as well as ZIRP and NIRP at struggling post-apocalyptic economies, central bankers found themselves being raised to near god like status. In a crashingly boring and monotone way, Janet Yellen has turned the American interest rate ship around and has quite elegantly first withdrawn stimulus and now begun the long process of normalising monetary policy. She has quite clearly been through the Greenspan school of public speaking which teaches how to talk plenty but to say very little. It was after all Alan Greenspan who coined the phrase "If you think you understood what I just said, then you clearly weren't listening...."


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