Easy money propels stocks to new highs

Interest-rate cuts in the US and renewed quantitative easing in Europe have driven rally in global equities, driving stocks ever higher.

Wave of money © Getty Images
It is impossible to overstate the role of monetary support in driving this year's stockmarket gains

Washington has finally agreed to "stop punching itself in the face", says Bloomberg's David Fickling. Markets cheered at the end of last week on the announcement of the long-awaited "phase one" trade deal between America and China. The MSCI All-World index hit a new all-time high on Monday on the resulting euphoria, with the Eurostoxx 600 following suit for the first time in more than four years.

A scary summer

The trade news provides a good bookend to the year, says John Authers on Bloomberg. On 1 August Donald Trump announced the planned pre-Christmas tariffs via Twitter, heralding a difficult summer for markets. The inversion of the yield curve later that month left many fearing impending recession. The 15 December tariffs had thus become something of a market totem, making their cancellation all the more sweet.

A key theme of the year has been the strong showing by safe-haven assets. The panic unleashed by Trump's trade tantrums and sagging global growth sent money flooding into bonds, dollar assets and gold. At its peak in late August as much as $17trn in government and corporate debt worldwide had a negative yield.

The dollar also defied predictions that it was set for a fall, strengthening past the seven yuan to the dollar mark this summer after China let its currency weaken. Gold is up almost 14% since 1 January. This year has "been an eventful one", says Neil Shearing of Capital Economics. Key to this have been the "dramatic u-turns" by central banks in the United States and Europe. The US Fed had been raising interest rates at the end of 2018, but weaker global growth triggered a shift to easing of a "speed and scale" that took many by surprise.

The central bank rally

The Federal Reserve has now cut interest rates three times since July, while the European Central Bank has restarted its quantitative-easing programme. The result was a rally in global equities. The S&P 500 is up 27% for the year to date, with the Eurostoxx 600 rising more than 24%. China's CSI 300 is on course to deliver a mammoth 34% gain. The FTSE 100 is up about 11.5% for the year.

That is surprising, given a year marked by shaky global growth, but stockmarkets seem to be taking their cues from central bankers. This year brought the "fastest pace of central bank easing since the financial crisis", says Michael Mackenzie in the Financial Times. It is impossible to overstate the role of monetary support in driving this year's stockmarket gains. Yet even as better global manufacturing data and a US-China trade resolution lead many to conclude that the worst has passed, central bankers are taking no chances. Policymakers have signalled that money will remain easy for "the foreseeable future". In a world of "slumbering yields", the challenge for investors now is to find a way to navigate a landscape of overpriced bonds, expensive US stocks and "limited upside". Welcome to the era of "indefinite monetary support".

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