Monday, 9 April 2018

Central bank tightening could lead to “market panic”

The S&P 500 fell 1.4 percent last week.

In a volatile week, the S&P 500 rose for three consecutive days but still ended the week down as a result of 2.2 percent declines on Monday and Friday.

Much of the attention last week was on a simmering trade war between the US and China after the former announced tariffs on the latter and China responded with retaliatory tariffs.

However, James Dimon, the chief executive officer of JPMorgan Chase & Co, reminded readers in his annual letter to shareholders on Thursday that markets were also facing the reversal of quantitative easing by the world's central banks.

“Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal,” he wrote. “I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think.”

Faster-than-expected Fed tightening “could lead to more uncertainty and market volatility”, which in turn could “create market panic”.

Dimon did add that he thought the odds of such a panic are low.

Not so Guggenheim Investments' global chief investment officer Scott Minerd.

“As interest rates keep ratcheting higher, with record levels of corporate debt it's going to be harder and harder to service,” Minerd told CNBC.

“Ultimately, when the chickens come home to roost and we have a recession, we're going to see a lot of pressure on equities especially as defaults rise, and I think once we reach a peak that we'll probably see a 40 percent retracement in equities,” he warned.

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