By William Watts, MarketWatch
Has the “Yellen put” finally expired?
Financial markets are in the grips of a global rush to safety. Central banks, whose flood of liquidity have been given much of the credit for the sharp postcrisis rise in stocks and other asset prices, seem unable to stem the tide.
“This week may go down in financial history as the week when central bank planning died—the 2016 version of the fall of the Berlin Wall. It sounds worse than it is, as this was always coming,” said Steen Jakobsen, chief economist at Saxo Bank, in a Thursday note.
Markets took little comfort in two days of testimony by Federal Reserve Chairwoman Janet Yellen . The S&P 500 /quotes/zigman/3870025/realtime SPX -0.85% and Dow Jones Industrial Average /quotes/zigman/627449/realtime DJIA -0.82% posted their fifth straight decline Thursday. The yen /quotes/zigman/16008150/realtime/sampled USDJPY 0.0000% , meanwhile, has soared despite the Bank of Japan’s easing efforts.
It was the Bank of Japan’s surprise decision in late January to impose a negative rate on some deposits that appeared to rock investor faith. As MarketWatch noted at the time, the move was viewed by many economists as desperate. Moreover, with central banks continually undershooting inflation targets despite extraordinarily loose policy, there are growing fears that the ability of monetary policy to affect the real economy has been impaired.
The ability of central banks to steer the market—or vice versa—was first dubbed the “Greenspan put,” then renamed the “Bernanke put,” and, finally, the “Yellen put.” A put option gives an investor the right to sell the underlying security at a preset strike price. In other words, bullish stock investors could count on central bankers to keep a floor under the market. That’s what some think is finally coming to an end.
“We have relied on central bankers to fix the world’s economic woes, when all they could really do was to get the global financial system back on an even keel,” said Kit Juckes, global macro strategist at Société Générale, in a note. “Keeping policy too easy, for too long and boosting asset markets in the vain hope that this would deliver a sustainable pickup in demand has meant that even a timid attempt at normalizing Fed policy has caused two months of mayhem.”
Now, amid a growing realization that central banks’ powers are on the wane, investors are rushing for havens, he said.
The Bank of Japan wasn’t the first major central bank to go negative. It joined the European Central Bank and the Swiss National Bank, as well as the Swedish and Danish central banks. But there are fears that negative rates will prove counterproductive.
Central banks have implemented negative rates in an effort to halt the hoarding of cash in a bid to fuel spending and push up inflation. But skeptics fear the strategy could backfire.
“The increasing number of central banks adopting [negative interest rate policies] is weighing on the profit outlook for financial companies that now must pay to hold some of their reserves at the central bank and hurting the performance of the global financial sector.,” wrote Jeffrey Kleintop, global chief investment strategist at Charles Schwab, in a blog post .
A main worry is that banks might have to push up lending rates to cover the cost of holding some reserves at the central bank. As a result, it’s the financial sector, not falling oil, that has been the leading driver of the fall in global stocks in 2016, Kleintop said (see chart above).