Financial markets diverge as central banks start to turn off the taps

INVESTORS are learning to let go of Daddy’s hand. Monetary policy has been very supportive of asset markets over the past eight years but the direction of policy is tilting slowly.

The Federal Reserve has increased rates twice already and is expected to push through another three increases this year. The Bank of England has indicated that the next move in rates could be up or down, but that the former looks more likely, especially as inflation is on the rise. The European Central Bank is scheduled to reduce the amount of bond purchases it makes after the end of March. Only the Bank of Japan seems committed to keeping the monetary taps on “full”.

The market impact is already visible. Morgan Stanley says there has been a “crash” in the tendency for assets to correlate with each other in recent months (see chart). Its measure incorporates correlations between different markets (equities and corporate bonds, for example), and between different regions.

The recent fall in correlations takes the measure back to where it was in the run-up to the 2007-08 financial crisis. During and after the crisis, correlations rose…Continue reading

from Business and finance http://www.economist.com/news/finance-and-economics/21715661-monetary-policy-tightens-markets-are-learning-let-go-daddys?fsrc=rss

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