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View the article online at http://citywire.co.uk/wealth-manager/article/a757321

The greatest market risk of all…

by Dylan Lobo on Jun 17, 2014 at 10:44

The greatest market risk of all…

Before Mark Carney's rates comments last week, the FTSE had been on a smooth upward trajectory with a remarkable lack of volatility.

Carney's warning rates will rise 'sooner than expected', combined with the political tensions in Iraq, have stoked volatility in markets without quite causing a ‘Minsky moment’.

American economist Hyman Minsky won acclaim for his research into financial crises where periods of serenity are followed by collapses.

His theories were based on the philosophy that in boom time excess private sector flows move into increasingly speculative investments. When the resulting bubble bursts banks and lenders are forced to tighten credit availability - even to those solvent firms - causing the economy to contract.

The current placid attitude to risk among investors is giving some cause for concern.

‘The serene progress of equity markets so far this year, and indeed for much of the last two years, continues to worry those trying to call the short term - the absence of things to really worry about is, in itself, worrying,' Barclays head of equity strategy EMEA William Hobbs says,  

Meanwhile Bank of America Merrill Lynch (BofMA) points out that more than five years after the global financial crisis this remains a ‘lukewarm ‘ recovery.

‘The “fire” of zero interest rates & central bank liquidity continues to be doused by the “ice” of consumer and corporate deleveraging and the deflationary disruption of increased regulation and tech innovation. We are not living through an era of big economic growth upgrades,' the investment bank said.  

Yet asset prices keep rising, with the speed and magnitude of the US stock market recovery from the 2009 lows only ever surpassed by the recovery from the 1932 lows.

What is more surprising is the fall in government bond yields, with this decline proving extremely positive for financial markets.

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1 comment so far. Why not have your say?

Keith Cobby

Jun 17, 2014 at 16:45

Surely Government bond yields are falling because central banks are buying vast quantities of them.

The main reason why the recovery is 'lukewarm' is because of the vast amounts of private and Government debt. Consumers cannot borrow any more and are very cautious.

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