Writing this blog one is beginning to sound a bit like a broken record as equity markets around the globe on Monday once again fell sharply. Continued stresses on the global economy leading to renewed fears about the global banking sector, Monday’s catalyst. Bank shares took the brunt of the fall for this reason, particularly in Europe, as Deutsche Bank shares fell ten pct on renewed capital adequacy fears. Credit default swap prices, the cost of insuring debt of banks, has been rising recently, adding to these increased fears. Banks borrow short and lend long, the fall in bond prices impacts banks margins. Negative rates, which have been used as a method by central banks to boost the economy, are now drawing fears that the impact they have on net interest margins at banks may have the opposite impact.
Banks take in deposits and lend against those deposits, if negative rates reduce deposits it can reduce the lending capability of banks, a negative for the economy. The hope is that some of the money goes into direct investment, what the central banks want one assumes, which should boost the economy. If money goes into the bond markets instead, that does little for the economy.
Sentiment indicators which not so long ago were virtually unknown, now seem common place when investors are trying to gauge when is a good time to buy and sell. We are often known to quote them in this blog. They seem to work best in “normal market conditions”, at times of extreme for example 2007/2008 they seem of less relevance.
Bearish calls appear to becoming more consensual by the day and banking concerns will only increase those fears. Small rays of sunshine, for example increased copper demands from the Chinese or better wages reports in the US, and the recent change in tack of the US dollar are ignored, as the investors continue to focus on what appears to be a gathering storm.
Central Bankers refer to what could happen in the next crisis, it feels like there is a stream of articles talking about the collapse in the global economy and impending stock market doom. Perhaps the world will work itself into another crisis, and perhaps central bankers will be powerless, one assumes they can’t go cutting rates for ever. History suggests economic crisis tends not to happen when everyone is expecting it, they tend to happen as in 1987, 2000 and 2008 when no one expects them. One would also assume central banks now work in a more coordinated manner to prevent another global crisis unlike in 2008. Time will tell, one day hopefully normality will come back and sentiment indicators may become useful again.