Markets lose faith: This isn’t 2008, but it isn’t great either

SO FAR, 2016 has been something of a disaster around global markets. Equity and commodity prices have been hammered. Yields on safe government bonds are plumbing extraordinarily low levels. Investors seem to be terrified. But of what?Recession talk has increased, but real economic data in most countries don’t look especially bad (though they are backward looking, and enough market pessimism can at any rate turn self-fulfilling). Some suspect the mess is a reaction to troubles in the European banking system. European bank shares are tumbling, ginning up bad memories of the financial crisis. But while European banks have their problems (and could create many more if the European economy sank back into serious recession) it does not look like the cause of current market jitters. European banks are better capitalised and have access to massive amounts of liquidity thanks to the European Central Bank. This is not a situation like 2008, when markets doubted banks’ solvency, banks struggled to fund themselves, and credit markets collapsed.What about the widespread adoption by central banks of negative interest rates? On January 29th the Bank of Japan joined the negative interest rate club, and on February 11th the Swedish Riksbank reduced its policy rate deeper into negative territory. Negative rates, it is argued, squeeze bank margins, threatening profitability and …

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