Japan’s Nikkei Index touched the highest level seen since 1996 this week while US and European equity indices saw record highs. Brazil equity indices are trading at record highs.
Commodity prices as measured by the Reuters CRB Commodity index has come off over the last one year. Oil and gold are not looking up though they are up from lows. Bond yields too are up from lows but are not factoring in any major rise in inflation expectations.
In the currency markets, USD has come off from highs while Euro and Yuan have gained sharply.
Economic data has definitely improved in the major countries. Manufacturing indices are up, unemployment rates are down and inflation is well under control . Central banks are able to keep rates low and liquidity high and this is helping markets to take on risk.
The question is “How Long will this Euphoria Continue and will there be a Bust?. This is the most difficult question to answer, especially for central banks. Pulling the plug on accommodation too soon can lead to all the good work post 2008 financial crisis come undone. Economies were in recession and on the brink of depression post the crisis.
US came out of the slump first and now Eurozone is following. China is happy with growth at current levels of 6.9% while Japan’s growth is looking up. Central banks brought rates to 0% and lower and increased their balance sheet size multiple times to pull economies out of recession and get them on to the growth path.
Fed was the first to stop QE and start to raise rates in December 2015. Fed has raised rates four times since then and is looking at one more rate hike this year to take the Fed funds levels to 1.25% – 1.50%. ECB and Bank of Japan are continue 0% rates and QE though ECB is looking to stop QE first before raising rates. However, rates are well below highs seen in 2007 and will stay low for prolonged period of time if inflation stays down.
At this point of time a bust driven by policy makers is definitely not on cards and markets will have to inflate an incipient bubble more for it to bust.