Global bonds and stocks lashed by policy rethink, talk of turning point

Mon Sep 12, 2016 10:15am EDT
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By Ayai Tomisawa, Saikat Chatterjee and Dhara Ranasinghe

TOKYO/HONG KONG/LONDON (Reuters) - A sudden surge in government borrowing rates across the world has jarred global markets, reflecting mounting investor anxiety that central banks have run out of both tools and ideas to stimulate economies on their own.

Eight years after the credit bust and banking crash forced them to flood the world with cheap cash to refloat the global economy, central bank success in preventing a protracted recession has been soured by a failure to get growth and inflation back to pre-crisis levels.

A slow-growth world of flat wages, over-inflated asset prices and falling projected returns has since become entrenched, and electoral protests from angry citizens quizzing the benefits of globalization and capitalism are rife. Britain's June vote to leave the European Union is a prime example, but so is support for populist policies and parties across Europe and in the U.S presidential election.

Investors sense a rethink of macroeconomic policymaking will result from the political quakes, and this may put hopes of ever-easier central bank credit policies on hold while governments consider possible solutions from adjustments to spending and taxation.

"There is an injection of uncertainty over whether monetary policymakers are at a turning point," said Mizuho strategist Pater Chatwell.

The idea of a policy turning point, fostered by signs of hesitation at European and Japanese central banks and warnings by the U.S. Federal Reserve of the need to nudge interest rates higher for the second time in 12 months, has unnerved financial markets that have long been priced for many more years of paltry growth and inflation but relentless central bank support.

Deutsche Bank's annual report on world asset returns last week said the current constellation of economics, policy and markets marked an inflection point.

"We're about to see a reshaping of the world order that has dictated economics, politics, policy and asset prices from around 1980 to the present day," said the report. "Extrapolation of the last 35 years could be the most dangerous mistake made by investors, politicians and central bankers."   Continued...

A picture illustration of crumpled kuna, Dollar and euro banknotes, taken in Zagreb January 18, 2011. REUTERS/Nikola Solic