As Politics Boil, Financial Markets Are In Dream Land

Elections bring anxiety yet markets are calm, but the reasons behind the anxiety threaten markets

By Richard Barley

Political shocks over the past two years suggest that life outside of the financial markets isn’t as rose. Above, protesters demonstrate in London. Photo: andy rain/European Pressphoto Agency

Financial markets are in fairy-tale land. Surprises like the U.K. election, the victory of President Donald Trump and Brexit show a deep unease with economic conditions. Yet easy money, relatively steady global growth and low inflation have encouraged talk of “Goldilocks.”

“Goldilocks has not left us yet,” was how J.P. Morgan strategists summed it up recently. They aren’t alone: analysts and economists at Société Générale , ING and Citigroup also have rolled out the markets’ favorite fairy-tale character. Growth isn’t too hot, not too cold, and performance has been buoyant. Global stocks are up, with the MSCI World index gaining nearly 10%. Low inflation means bonds are supported too. Credit markets are strong, and U.S. high-yield bonds have returned 5%. Emerging-market stocks, bonds and currencies have gained.

The metaphor bears examining closely. As a reading of a globally coordinated upturn in growth, coupled with the large amount of liquidity from central banks, and minimal wage and inflation pressures, it might not be a stretch.

But the political shocks of the past two years, particularly in the U.S. and U.K., suggest that outside financial markets, it is a different story. People are fed up with the status quo. One key component of the Goldilocks situation is the absence of a pickup in wage inflation, which means central banks can keep policy loose. But continued poor real-wage growth may also stoke more political turmoil at the ballot box. That increases the risk of electoral shocks that investors may not welcome.

The U.K. is a case in point. The Bank of England’s chief economist, Andy Haldane, last year gave a speech asking who had benefited from the recovery, noting that despite data pointing to growth, half of all U.K. households had seen no expansion in real disposable incomes since 2005. The latest rise in U.K. inflation pushed real-wage growth back below zero just in time for voting. Central bankers around the world are puzzling over the apparent failure of wage formation to respond to falling unemployment, whether in the U.S., Germany, the U.K. or Japan. Yet their easy-money policies also have helped deliver extraordinary returns in financial markets.

And those past returns may yet cause an issue with the part of the Goldilocks metaphor that doesn’t get mentioned: the porridge. While nutritious, it is hardly particularly appetizing. And the starting point for financial markets is similar, because bond yields are ultralow, credit spreads are very tight and developed-market equities are far from cheap. Future return prospects are thus skinny, although emerging markets offer a brighter outlook. That helps explain why an apparently benign situation feels uncomfortable. Even as markets rise, there are few easy trades.

Goldilocks might stick around for a while, but fairy tales don’t have to have happy endings.

0 comentarios:

Publicar un comentario