Fed fueled stock surge

Over the past decade, ongoing fiscal and monetary interventions have severed the close link between financial markets and actual economic conditions. Since 2007, substantial injections of trillions into the economy by both the Federal Reserve and the Government aimed to stimulate growth. These efforts propelled asset prices and consumer confidence, fostering economic expansion. However, this direct correlation between interventions and market behavior, except for a brief period before Quantitative Easing during the Financial Crisis, has contributed to a disconnect between markets and the broader economy.

China keeps loan prime steady at record lows

China’s central bank, the People’s Bank of China, maintained its benchmark loan prime rate (LPR) at historically low levels in its final 2023 rate decision, aiming to sustain a slow post-pandemic recovery in the world’s second-largest economy. The one-year LPR remained at 3.45%, and the five-year LPR, affecting mortgage rates, stayed at 4.20%. This move was anticipated after the recent stability in medium-term lending rates the previous week. The decision followed November data indicating ongoing weaknesses in China’s economy, marked by contracting manufacturing activity and subdued consumer spending that further pushed the country towards deflation.

European equities rally on rate cut speculation

Following Powell’s policy shift, market sentiment turned bullish, prompting significant buying activity. On Wall Street, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite surged to new all-time highs. In Europe, the pan-European STOXX 600 index too closed up following comments by ECB member Francois Villeroy de Galhau, advocating for 2024 interest rate cuts and expecting inflation to reach the ECB’s 2% target by 2025. Despite ECB President Christine Lagarde’s recent reluctance regarding immediate rate cuts during the central bank’s meeting, markets remained skeptical, leading to ongoing uncertainty. Traders and investors are currently mildly bullish on European assets and are not hesitant on buying the dips.

BOJ keeps ultra-loose policy intact

The Bank of Japan held interest rates at ultra-low levels on Tuesday and slightly altered the rhetoric around its yield curve control (YCC) policy, while also forecasting higher inflation levels in the coming years. The BOJ left its short-term interest rate at -0.1%. The bank currently allows 10-year yields to move in a range of -1% to 1%, as part of its YCC policy, and left that rate unchanged. The BOJ also said it will continue with its current pace of asset purchases and quantitative easing to stimulate the economy, citing continued uncertainty over higher inflation and worsening global economic conditions. The move comes as the bank struggles to maintain a balance between supporting the Japanese economy, stemming further weakness in the yen while also grappling with stickier inflation levels.

Markets disconnected from economy

The significant surge in stock market values is attributed to the to loose policy conditions by the world’s biiggest central banks. However this growth does not correspond to a proportional increase in overall economic growth or corporate revenues. This gap indicates that stock prices have inflated more rapidly than both the economy and corporate earnings, influencing investors to associate stock buying in unfavorable financial and economic conditions, as notably seen during and post the pandemic-era shutdown.

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