Financial markets have clearly become addicted to central bank stimulus and like any addict, they are getting more erratic.
The huge about-turn on Wall Street on Tuesday was almost as harrowing as the volatile opening decline on Monday. The reaction to stimulus being injected or withdrawn is becoming more volatile and central banks pandering to market demands could be making matters worse.
Markets are rebounding on Wednesday after the People’s Bank of China announced the decision to inject 140bn yuan ($21.8bn) into the economy.
Rather than getting ahead of the game with a well thought out plan for stabilising the economy, the People’s Bank of China appears to be reluctantly easing policy any time there’s a drop in share prices. The net effect is that markets clamour for more stimulus while at the same time losing faith it will actually work.
How the Federal Reserve reacts to the market volatility at its meeting next month will likely determine how long the sell-off lasts.
Chinese markets have closed lower for the worst five day run since the nineties leading to a lower start in Europe. European shares rebounded off the lows and US markets are looking to open higher following the decision by China’s central bank to pump more money into the Chinese economy on Wednesday. Though in the current fear-driven environment, where a market opens doesn’t bare much relation to where it closes.
Mining stocks are leading by example when it comes to volatility on the FTSE 100. Having driven the recovery on Tuesday, the basic resource sector is the biggest faller on Wednesday, dropping in line with oil and industrial metal prices. Outside of the benchmark index, shares of Betfair gained over 20% on news of a merger being agreed with rival Paddy Power.
US clothing retailers Abercrombie & Fitch, Guess? and Express are expected to report earnings on Wednesday.
Futures suggest the:
S&P 500 will open 33 points higher at 1,900 with the
Dow Jones expected to open 288 points higher at 15,954 and the
Nasdaq 100 63 points higher at 4,079.
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