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Global Rebound Euphoria tests central bankers’ nerves on risk

(Bloomberg) – As the world barely goes through the worst of an unprecedented crisis, central bankers are already wondering if the next one is imminent. From Washington to Frankfurt, what started months ago as a whisper of worry turned into a chorus. As officials question whether a risk-taking frenzy in multiple asset markets could portend a destabilizing rout that could derail the global recovery. 2008 financial crisis. Meanwhile, the dramatic swings in Bitcoin after a cryptocurrency warning from the People’s Bank of China showed just how sensitive some markets have become. Global monetary institutions pessimists can find bubbles almost everywhere they look, from stocks to real estate, while officials such as Federal Reserve Chief Jerome Powell argues that all threats remain contained: central banks bear some responsibility for the fervor of financial markets after huge doses of stimuli and cash injections to keep economies afloat. The resulting dynamism is at least in part a euphoric effect, applauding a pullback in growth the magnitude of which can only be guessed at – with eventual repercussions deemed to range from a mild boom to an inflationary spiral. growth expectations, ”Max Kettner, strategist at HSBC Holdings Plc, told Bloomberg Television. “Particularly in the United States, they have been brought up to an enormous degree. So it is, I think, exuberance. Market speculation has led to high volatility lately, including wild gyrations and Bitcoin declines from a record high above $ 60,000 in April. More traditional assets are also struggling, with rates on German safe-haven bonds, for example, climbing around 50 basis points this year, closing in on entering positive territory for the first time in more than two years. The European Central Bank used similar words on Wednesday, echoing former Fed Chairman Alan Greenspan’s 1996 observation of “irrational exuberance” before the dot-com bubble. The Eurozone institution observed the threat of economic fallout, for example, a correction in the US stock market. Bank of Canada officials expressed similar concerns a day later and pointed to the housing market as expectations of continued price hikes fueled purchases. the dangers posed by the activity of hedge funds. In a subsequent report, they warned of “vulnerabilities” and “stretched valuations,” exacerbated by high corporate debt. Meanwhile, Bank of England Governor Andrew Bailey recently wondered aloud if stock and Bitcoin speculation could itself be a ‘warning sign’. And a Norwegian official said cryptocurrency volatility could threaten lenders if their exposures continue to rise. Central banks have had lingering concerns for some time. Already in January, Isabel Schnabel, head of ECB markets, told her colleagues that stocks could become vulnerable to “wider repricing”. In China, with a recovery cycle more advanced than that of the United States, the main banking regulator revealed in March that it was “very worried” about bubbles, specifying “very dangerous” real estate investments. Perhaps this is in part what UBS AG CEO Ralph Hamers had in mind at the end of April with his own alarming vision. Noting “bubbles in certain asset classes” including real estate, he told Bloomberg Television that “we are nearing the top of the game.” Some senior central bankers are trying to be optimistic despite the flashing lights. After the Fed’s decision in April, Powell insisted that “the overall financial stability picture is mixed, but overall it is manageable.” ECB Vice-President Luis De Guindos – whose job it is to prepare the threat assessment of his institution – reversed his worried tone last week, saying that the economic risks are “much more balanced than by the past”. The difficulty for central banks is to manage the consequences on asset prices of their monetary policies, a challenge that has plagued them since the 2008 calamity. Periodically, this makes institutions such as the Fed the target of criticism. “Central banks are desperate for insurance, for being certain,” said James Athey, chief investment officer at Aberdeen Asset Management Plc. “It also means that they are keeping politics too easy for far too long.” The other solution for officials is to dare to cut stimulus measures, running the risk of stifling an economic recovery with a corresponding cost to livelihoods. Iceland took this step last week. , achieving the first political tightening in Western Europe with rising interest rates to contain inflation and a frenzied housing market.The enlarged euro area, whose constituent regions vary from some of the most prosperous in the world to examples of perpetual discomfort, can not be so nimble. This is why the ECB recommends “more targeted” budget support for companies while avoiding the withdrawal of stimulus measures. Likewise, the Fed cited the use of macroprudential tools as important to allow monetary policy to take its course. JPMorgan economists wrote this month that they expect Australia’s banking regulator to “formalize” restrictions on debt and income lending soon. a rebound from a severe crisis in a world that will find it hard to tolerate another.At least those in charge can take comfort in recognizing a more familiar, pre-pandemic environment: The last time their concerns about risk were so synchronized, it was in November 2019, just a few weeks away. before the coronavirus begins to cripple the global economy. More stories like this are available at bloomberg.com Subscribe now to stay ahead with the most trusted source of business news. © 2021 Bloomberg LP



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