Would Central Banks Step in If Stocks Tumble, Could They Stop It?
• Global central bank Stimulus has offered massive support to financial stability and market strength
• Yet, we are reaching an point where both markets and extraordinary support efforts are both over capacity
• If 'risk aversion' starts to set in, some central banks will act immediately but most may hold back
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While the stumble in global equities and jump in volatility across multiple asset classes is not yet indicative of full blown 'risk aversion', the reality of diminishing returns and ballooning risk is hard to ignore. With a market correction inevitable - just a matter of time - we should consider what our expectations are from the central banks should we enter such a phase shift. Some no doubt plan to hold on under the assumption that monetary policy authorities will jump in immediately to prevent a significant correction in equities, emerging market assets, carry trade, etc. Others on the alternative extreme of the spectrum suspect that these critical pillars of market strength wouldn't be able to stem the tide. What is more likely falls somewhere in between. Some key central banks will be very reactive while others will hold back unless the financial situation is severe. A coordinated effort would be one of the few effective options should the system begin to seize but its impact would likely be short-lived. We evaluate the backup safety system that many are saddling too much faith on in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.