Recent market stability in the face of several significant central bank announcements may actually be an indicator of a lack of conviction rather than a sign of consensus, according to Man FRM.
The US Federal Reserve, the Bank of Japan, and the European Central Bank have all issued announcements, but Man FRM noted that “major financial markets ended September at broadly the same levels as they began”.
“Market stability isn’t an indicator of a consensus in the shape of a new market regime, but rather a lack of conviction,” the company said.
“[This may be] a confession that nobody really understands how to approach thorny topics of lower economic growth, record government debt, and risk-asset valuations that manage to look expensive - relative to history - and cheap - relative to bonds - at the same time.”
Man FRM said political uncertainty may be a driver of this, citing the possibility of a Trump victory in the US presidential elections and the falling support for Germany’s ruling Christian Democratic Union as prime examples.
“On the face of it, none of this looks good for the stability of the EU, and an unstable EU could be sufficient ammunition for a bearish viewpoint to take hold globally,” the company commented.
“However, it is too easy for bears, particularly those viewing developments from the US, to imagine Merkel as the glue that holds the EU together.”
The company cautioned that this attitude “underestimates the depth of the political will in Germany, France, and Italy toward the European project”, adding that core European electorates had a long way to go before introducing a mandate for the disbanding of the European Union.
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