As the latest Bank of America Merrill Lynch Global Fund Manager Survey pointed out, while fear continues to dominate over greed, a big factor behind the fresh optimism seen within markets is the expectation that central banks will continue to prime the liquidity pump.
Of those surveyed, 78% expect the BoJ and the ECB to continue with negative interest rate policies for the next 12 months, BAML said. Adding that this “safe space of low and stable rates” that has been created by central banks is the reason behind the stubborn preference for deflation assets over inflation assets within the global markets.
The mantra of “never bet against central banks” continues to be repeated by many investment professionals, but there is a growing view that perhaps the central banks themselves are beginning to lose faith.
Monster worries
Alberto Gallo, portfolio manager at Algebris Investments is one such. Interviewed on Bloomberg TV on Tuesday, he said that the world is currently witnessing a “clash of central bankers”, with some willing to carry on regardless down the now well-trodden quantitative easing (QE) path and others beginning to acknowledge that more than just QE is needed now.
"The problem is, of course, that the longer central banks feed the monster, the riskier it is to continue riding it."
However, while there is a growing view that QE is not working, he said, it is unlikely to end anytime soon as the required fiscal policies have not been forthcoming and so central banks’ hands have been forced.
“I think there is a lot of fear in the market that we are sitting on the back of a monster that central banks are creating. Investors are afraid that the monster will wake up if, at some point, central bankers change their mind and decide to stop easing… I think we are getting close to a turning point in the thought of the central banks, they are beginning to question themselves for the first time. But, between that question and a change in policy I think there will be a long delay.”
