Markets infected by confidence pandemic

Markets infected by confidence pandemic

Imagine if swine flu had broken out on March 9. A health emergency would probably have thrown stock markets - then touching 10-year lows - into an absolute rout. But less than two months later, investors don't seem to care.

By Edward Hadas, breakingviews.com
Last Updated: 4:14PM BST 30 Apr 2009

The Dow Jones Stoxx 600 European index hit a 2009 high on Thursday. That followed Wednesday's rise in the yield on 10-year US Treasury bonds above 3pc. Investors won't cough up for risk-free assets, but will take commodities and emerging markets exposure in big doses. It's a kind of flight from safety.

Clouds become mere appendages to big silver linings. Investors overlooked worse-than-expected US GDP figures, focusing instead on the need to rebuild inventories. They rejoiced in a slowdown in the contraction of eurozone bank lending, without recoiling at the contraction itself. Even the likely bankruptcy of Chrysler has found a positive spin: uncertainty is lifted.


As for unequivocally bad news - a huge increase in eurozone unemployment, confirmation that UK house prices are still falling - it is simply ignored.

Investors seem to be on a mood-enhancing drug. And in a sense they are.

Governments and central banks have been issuing vast quantities of a stimulant that gets investors and markets high - cheap money. Some of the liquidity created by near-zero official interest rates, effectively unlimited financing for banks and gargantuan fiscal deficits is almost certainly leaking into financial markets.

Investors, like policymakers, are betting that the optimism will prove self-fulfilling. Confidence makes consumers and companies more likely to spend and invest. Also, the liquidity should ease the financial squeeze, increasing the supply of credit for trade and inventories.

The cure is working so well that it's tempting to believe the monetary floodgates should remain open forever. But there's a reason why these policies are exceptional. They are likely to have adverse side effects - too high inflation if money stays too cheap for too long, or another squeeze if interest and tax rates rise too quickly.

The money drug is still in trials. What's more, it may do little to combat the underlying disease of globally unbalanced production and consumption. A long and painful recession would do that. And markets may yet follow the economy rather than the money.

http://www.telegraph.co.uk/finance/breakingviewscom/5251575/Markets-infected-by-confidence-pandemic.html