Financial market turmoil continues

by: Han de Jong

Financial market turmoil continued last week as market participants further adjusted their expectations for monetary policy. It is not just US (monetary) policy that markets are focussing on. Intentions and actions by the new Chinese leadership are also weighed. We think that most of the likely adjustment of expectations concerning the course of US monetary policy has already been completed. That should mean that calm in bond markets should return before too long and should spread to other markets. However, when markets become very volatile and show large moves, market momentum can reinforce itself and markets can disconnect from economic reality. Normally, we try to assess what developments in the real economy mean for financial markets. But when markets go out of control, they ‘hijack’ the real economy. We then need to ask what market movements mean for the real economy. I do not think that we have reached that point yet. But risks that market volatility will have a negative impact on the global economy are rising. Meanwhile, the data flow was positive in the US and in Europe, not too bad in Japan, but the one relevant data release in China was discomforting.

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