Salient to Investors:

  • Investors still believe that whenever stocks and risk assets fall, the authorities will act to limit the losses to ensure they don’t take economies down with them.
  • Hans Redeker et al at Morgan Stanley said comments last week by Bullard and Haldane left markets with the impression that the ‘central-bank put’ is still in place.
  • Matt King et al at Citigroup estimate that zero stimulus would be consistent with a 10% quarterly drop in equities, so say it takes $200 billion from central banks each quarter to keep markets from selling off. King said the markets’ drops owe more to an almost belated reaction to a temporary lull in central bank stimulus than to any reduction in the effect of that stimulus in propping up asset prices.
  • Bank of America Merrill Lynch said another 10% decline in US stocks might spark speculation of a fourth round of QE. The Fed acted similarly following the equity declines of 11% in 2010 and 16% in 2011.
  • Citigroup said the ECB and BoJ stimulus in coming months will more than compensate for the Fed withdrawing QE as they fear a prolonged sell-off in markets would upend the fragile economic outlook – central banks are much more concerned about recession than asset-price bubbles so have little choice but to step back in.

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