Eroding Confidence

Markets shouted warning signs about central banks and the global economy Tuesday; we take a closer look. The US dollar led the way while the kiwi lagged. Japanese industrial production revisions and Australian consumer confidence highlight a light Asia-Pac calendar. The Premium English video has been posted earlier this morning, focusing on the growing divergences in US equity indices and the widening gulf between US and German indices. The FX and metals trades are also discussed in the video.

عودة مخاوف الأسهم تغير ميدان العملات (فيديو للمشتركين فقط)

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The move in markets Tuesday was more worrisome than on Friday. What drove fears Friday was the worry that the Fed was about to hike rates.

But Brainard yesterday put those concerns largely to rest.

So the renewed selling in stocks, bonds and everything-but-the-dollar is especially concerning. At best, there are worries about the Bank of Japan allowing long-term bond yields to rise could cause short-term dislocations. Or perhaps the worries are about some other rumored BOJ policy change next week that could be seen as a mistake.

At worst, markets may be losing confidence inentral banks and the global economy. Oil fell Tuesday on an IEA report talking about the continued oil glut but what escaped the larger economic discussion was that a big piece of the reason for continues oversupply is signs of soft demand in India and China.

Christine Lagarde also highlighted Tuesday that 2016 will be the fifth consecutive year of sub-3.7% global growth. A sense is spreading that this may be as good as it gets. Aside from Brexit, there have been minimal exogenous shocks to the global economy and yet strong growth remains a rainbow in the horizon almost everywhere.

Then again, it's foolish to draw conclusions based on one day of trading. Cheap money has kept the party going on this long and Brainard's speech proved once again that central bank leaders have no appetite for pain.

Or maybe they do and that's what the BOJ decision next Wednesday will show. Some of the rumored policy changes are hardly simulative. If that's the case then expect more of the same market moves on the realization that central banks have hit a wall.