Central banks behind many of 2015's market meltdowns

The Swiss National Bank's shock decision in January to abandon the Swiss franc's link to the euro was like an omen of further central bank actions that rocked markets worldwide.
The Swiss National Bank's shock decision in January to abandon the Swiss franc's link to the euro was like an omen of further central bank actions that rocked markets worldwide.PHOTO: REUTERS

WASHINGTON • Central banks were the familiar factors behind the biggest market meltdowns of 2015, with more volatility to be expected in the coming year as investors navigate away from the United States central bank's easy-money policies.

From the Swiss National Bank's shock decision in January to abandon the Swiss franc's link to the euro, to the European Central Bank's (ECB) disappointing stimulus package in December, a series of central bank decisions have provoked extreme market reactions, the Wall Street Journal (WSJ) reported.

In between, the decision by China's central bank in August to weaken the value of its currency fuelled fears about the state of its economy that set off a global stock sell-off.

The turmoil highlighted the growing reliance of markets on the words and actions of central banks around the world, in the years following the global financial crisis.

Low interest rates and massive asset purchases to kick-start ailing economies have encouraged investors to push into ever-riskier assets in search of returns, which made markets vulnerable to sharp reversals when trades turned sour, the WSJ report said.

WORSE TO COME

This year was a sign of things to come, and it'll probably get worse before it gets better. Central-bank policy pushed many investors beyond their comfort zone. Now we're seeing the consequences.''

MR PAUL LAMBERT, from London-based asset manager Insight Investment

"This year was a sign of things to come, and it'll probably get worse before it gets better," said London-based asset manager Paul Lambert of Insight Investment. "Central-bank policy pushed many investors beyond their comfort zone. Now we're seeing the consequences."

Investors were caught unawares when the Swiss central bank stopped intervening and abruptly removed its cap on the Swiss franc's value, leading to the currency plummeting by more than 40 per cent against the euro.

This month, currency investors were burnt when the euro climbed more than 4 per cent against the greenback after the ECB delivered a smaller stimulus package than many had expected.

In China, monetary policymakers caused several rounds of market gyrations this year, as investors struggled to interpret signals from a central bank that often fails to clarify its intentions.

"Investors are vulnerable to more episodes like these in the future,'' said managing director and portfolio manager Zhiwei Ren at Penn Mutual Asset Management.

"Central bank actions have been fuelling volatile trading and, in the current low-liquidity environment, holding a crowded position is a recipe for disaster."

The biggest challenge next year may be the one faced by the US Federal Reserve, which has sought to reassure markets that the move up from near-zero rates will be slow. But it is treading a fine line: Let investors know the easy-money party is over, without giving markets a sharp jolt.

Meanwhile, the ECB and the Bank of Japan continue to grapple with weak economies and low inflation that may force them to ramp up stimulus.

"I think 2016 will be quite challenging for central banks,'' said managing partner Stephen Jen at SLJ Macro Partners. "This is like an 18-wheeler trucker not being sure when and where to turn, but has promised the world that he would use the turn signal in ample time."

A version of this article appeared in the print edition of The Straits Times on December 29, 2015, with the headline 'Central banks behind many of 2015's market meltdowns'. Print Edition | Subscribe