Financial assets become “pricey” amid low interest rates

Markets were mixed on Wednesday.

The S&P 500 rose 0.8 percent to a record high while the STOXX Europe 600 rose 0.9 percent. However, the Nikkei 225 fell 0.5 percent.

Market sentiment may have been boosted by the nomination of current International Monetary Fund Managing Director Christine Lagarde as the replacement for Mario Draghi as the head of the European Central Bank. Lagarde is widely seen as inclined towards easier monetary policy.

Government bond yields fell, with the German 10-year bund yield falling to a fresh record low of minus 0.386 percent.

Indeed, Mark DeCambre at MarketWatch noted that stocks, bonds and gold have all become “pricey”.

“I think one of the unintended, yet in hindsight predictable, outcomes of ZIRP [zero interest-rate policy] was to force investors into looking for returns anywhere they can find it,” Michael Antonelli, a market strategist at Baird, was quoted as saying.

And yet, DeCambre also noted that easy monetary policy may be becoming less effective.

DeCambre cited a report by Torsten Slok, chief economist at Deutsche Bank Securities, titled “QE no longer works”.

“Given the current level of inflation expectations and the current level of rates, doing QE again is not going to create the same surprise effects,” wrote Slok.

DeCambre also cited a paper that suggested that “a persistently easy-money environment provides little leeway for stimulus if inflation proves preternaturally sluggish, as it has thus far”.