Stock market chaos: The end of easy money?

This week saw a brutal selloff in global stocks which accelerated as the week got under way.

On Monday and Tuesday, stocks fell dramatically, erasing all of the gains of 2018 in a matter of hours. And then, stocks recovered and have been pretty volatile since.

So what is behind the wild swings in stocks and bonds from New York to London to Tokyo?

The prospect of higher interest rates across the globe was the main reason given by analysts for the market rout.

The world economy is just emerging from a period of record low-lending rates, and in some cases negative interest rates, all designed to revivify the global economy.

Nearly a decade of ultra-easy monetary policy by central banks has sent asset prices sky-high, but now that’s likely to end. Things like stocks, bonds, commodities and currencies are going to have to adjust.

“For too long, investors were sleepwalking into the raging bull market that was going on underneath them. And investors and traders forgot the financial markets can fall as well as rise,” says market analyst David Madden at CMC Markets.

It's almost like the economy has gotten off the ground and now the economy is going to have to survive more on its own momentum, rather than the guiding hand of central banks.

by David Madden, market analyst, CMC Markets

“There was so much positive momentum, there were so many positive indicators and so much enthusiasm surrounding global stock markets … that investors, quite frankly, got complacent. They ignored the fact that volatility was at multiyear lows and they assumed that stock markets would keep reaching fresh record heights here in Europe or in Asia. We did hit a speed bump when we saw average earnings in the US spike last week, sending fears we could have four rate rises from the Federal Reserve this year. That’s what prompted this exodus out of equities,” he explains.

“This is a classic example of the market being overbought, overstretched, and the selloff you’ve seen recently is all the froth being taken off the top of the market.” 

The era of easy money is perhaps over, according to Madden.

“I think we’re entering the transition period whereby central bankers in the last number of years had very aggressive loose-margin policies to kick-start the economies around the world. And we’re now probably in the phase where the central banks are looking to step back and in many cases actually tighten the margin policy – be it in the form of higher interest rates or a reduction in the stimulus package,” he says.

“So, it’s almost like the economy has gotten off the ground and now the economy is going to have to survive more on its own momentum rather than the guiding hand of central banks.”

Also on this episode of Counting the Cost:

Suffragettes: This week marks 100 years since women were given the right to vote in the UK. Activists at the forefront of that campaign were known as Suffragettes. The Museum of London threw an epic victory celebration to remember and teach about the suffragettes who took on the government and won, as Barnaby Phillips reports.

Laos debt: Concerns are growing about how much money the government in Laos is borrowing from China putting the country into deeper debt. Wayne Hay reports from the Laotian capital, Vientiane.

Ryanair Jordan: Ryanair said it’s launching flights to Jordan for the first time. The low-cost Irish airline already flies to Israel and Morocco. Its first route from Amman in Jordan to Paphos in Cyprus will begin in March.

SpaceX launch: Billionaire entrepreneur Elon Musk’s company SpaceX sent one of his Tesla electric cars into space, as Rob Reynolds reports. The successful launch gave Musk’s company a boost, which wants lucrative contracts with NASA, the US military, and satellite companies.

US oil production: Oil production from US oil wells is at all-time heights. US figures show that weekly production is already above 10 million barrels a day. The US Energy officials predict output will top 11 million barrels a day by the end of the year. This couldn’t come at a worse time for OPEC, which is trying to cut production in order to wipe out oversupply concerns and support prices. Antoine Halff, senior research scholar at the Columbia University Center on Global Energy Policy, gives his take.