Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
An account already exists for this email address, please log in.
Markets are addicted to QE
Stock markets have come crashing down as central banks hold back on further rounds of money printing.
"For all the signs of [US] recovery, it turns out what investors really care about is QE3," says James Mackintosh in the Financial Times. Last week, the minutes of the US Federal Reserve's latest meeting were released. They showed another dose of quantitative easing, or money-printing, has become less likely.
Stocks promptly tanked, with European and US markets falling by 2% and 1% respectively. The European Central Bank (ECB) also appeared to rule out another major liquidity injection. Over the past few months, it has lent banks around €1trn of extremely cheap money.
Investors and traders "were collectively throwing their toys out of the cot at the prospect of the major central banks no longer supplying them with continuous, endless and free liquidity", says Fxpro.com. As with an alcoholic denied booze, "threatening to withdraw liquidity from heavily-addicted asset markets can have very nasty consequences".
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The chart shows how strongly the performance of the US market, which tends to set the tone for world equities, has been linked to the Fed's cash injections in recent years.
Operation Twist is a stimulus programme whereby the Fed sells some of the short-term bonds it's amassed with printed money, and uses the proceeds to buy longer-term bonds. It thus tries to stimulate the economy by lowering long-term interest rates. Twist coincided with the ECB's cheap three-year loans.
For some time now, markets have appeared to want it both ways. On the one hand, they have been cheered by better data, but also by signs of more liquidity. Yet if the latter is needed, then the economy is clearly in poor shape hardly a reason for market optimism.
MoneyWeek videos
What is Operation Twist?
Tim Bennett explains the Federal Reserve's latest attempt to stimulate the flagging US economy.
Moreover, it's become clear that injecting printed money into the economy hasn't magically caused a vigorous recovery. QE "can create confidence and buy time, but it will not solve the underlying difficulties caused by the long-lasting debt deleveraging process", says Andrew Milligan of Standard Life Investments.
So why this desperation for more QE? What investors wanted was a "kind of postmodern Goldilocks economy", as Mackintosh puts it. "Not too hot to discourage QE3, but not so cold as to bring on a new recession." However, what they're getting is "lukewarm porridge: no QE3, but slow growth".
Sign up for MoneyWeek's newsletters
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
