Earlier this year, we posited that the markets were reaching the point at which a significant percentage of investors no longer had faith in Central Banks’ abilities to put off the business cycle.
This now appears to be the case. In the last month, three Central Banks have announced policy changes. All three of these changes were alleged to be bullish in nature.
1) The European Central Bank (ECB) cutting rates further into NIRP and extending its QE program through March 2017.
2) The US Federal Reserve hiking interest rates from 0.25% to 0.5%.
3) The Bank of Japan (BoJ) boosting its ETF purchase program to $2.5 billion per year.
Following ALL THREE of these developments, the respective stock markets sold off.
First off, on December 3rd, the ECB announced it was cutting its deposit rate further into NIRP from -0.2% to -0.3%. It also announced that it would be extending its QE program through March 2017.
European stocks crumbled on the news, resulting in ECB President Mario Draghi having to make a desperate verbal intervention that the ECB would do more if needed the very next day. But even that failed to stop stocks from collapsing soon after.
Next up was the US Federal Reserve.
In the build up to the Fed’s December rate hike, we were told repeatedly that this was a bullish development because it signified that the US economy was strong. Time and again, the financial media and Fed claimed that the rate hike would drive stocks even higher.
Then the Fed raised from 0.25% to 0.5%. The very next day stocks collapsed. They’ve continued to fall since.
Finally, last Friday the Bank of Japan announced that it would be boosting its ETF buying program by ~$2.5 billion per year. Again, this was meant to be a bullish development as it indicated the BoJ was willing to do more to prop up the markets.
The Nikkei bounced briefly on the news before selling off hard. Even the usual Monday boost failed to ignite a significant rally in Japanese stocks.
Thus, we have THREE Central Banks, all implementing policies that they claimed were bullish. ALL THREE OF THEIR STOCK MARKETS FELL SOON AFTERWARDS.
This is a clear sign that Central Banks’ promises and policies are no longer having the same effect they once had. Given that Central Banks have been the primary drivers of stock markets since the 2009 bottom, this strongly suggests that the Great Reflation efforts of the Central Banks are ending.
If this is the case, then it’s only a matter of time before stocks collapse. Every bubble of the last 15 years has resulted in a market crash. This time will be no different.
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Chief Market Strategist
Phoenix Capital Research