Central banks are creating 'fake markets,' Bank of America strategists say
Submitted by cpowell on 03:49PM ET Tuesday, May 26, 2020. Section: Daily Dispatches One bank, one news organization. It's a start.
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By Elliot Smith CNBC, New York Friday, May 22, 2020
Stocks have become detached from reality due to recent interventions from central banks into the bond markets, according to analysts at Bank of America.
In a research note Friday, the Bank of America Securities division highlighted the question of why the stock market is so divorced from reality as one of the most frequently asked by investors.
Despite the economic crisis brought about by the coronavirus pandemic, which has so far seen 38 million Americans file for unemployment and brought about sharp contractions in global gross domestic product, risk assets have been rallying of late. As of Friday morning the S&P 500 is up more than 14% and the Dow Jones Industrial Average more than 11% so far this quarter, rebounding from a historic selloff in March as the coronavirus spread in the U.S. and throughout the rest of the world.
Chief Investment Strategist Michael Hartnett set out a number of key reasons for this unmooring of stocks, the first of which was the emergence of "fake markets."
"Government and corporate bond prices have been fixed by central banks. ... Why would anyone expect stocks to price rationally?" Hartnett said.
Central banks have deployed a total of around $4 trillion of asset purchases over the past eight weeks, Hartnett highlighted, and the global equity market cap has surged by $15 trillion.
In the same period, central banks have been buying $2.4 billion per hour of financial assets, which Bank of America strategists expect will fade to $608 million in the coming weeks. ...
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