As we all know, the Federal Reserve raised the fed funds rate by 25 basis points in December 2015. Since that quarter point rate increase the stock markets around the world have been tumbling lower. Volatility has surged higher as central banks around the world scramble to figure out there next move. In the past, jawboning by the Federal Reserve has been used to calm the markets, but this time many traders and investors believe that the Federal Reserve has its hands tied. Stocks now seem to come under severe selling pressure on a daily basis.
Recently, the 10-year U.S. Treasury Note yield has plunged to 1.72%. This is signaling that investors would prefer to be in U.S. Treasuries instead of stocks. Oil prices have plunged to less than $30.00 a barrel signaling weak global demand and a stronger U.S. Dollar. What can stop these markets from deflating further? In the past, the answer to a deflating market has been lower interest rates and add lots of liquidity (quantitative easing) to the system. These days the large European banks such as Deutsche Bank AG (NYSE:DB), Credit Suisse Group AG (NYSE:CS), Banco Santander, S.A. (SAN), and UBS Group AG (NYSE:UBS) are making new multi-year lows on a daily basis. In fact, most of these Euro bank stocks are making new all-time lows. Something is wrong when leading financial stocks have this type of price action.
Problems in Asia have been increasing on a daily basis. The Nikkei 225 Index has dropped by nearly 4000 points since early December. The Shanghai Composite Index has plunged by nearly 50.0 percent since its June 2015 high. What are these central banks going to do to help stabilize these markets?
In late 2008, the central banks around the world staged a very coordinated effort to inflate the stock markets around the world. Can they do this again? After all, the Peoples Bank of China, the Bank of Japan, and the European Central Bank are all doing there own version of quantitative easing right now. So what is wrong? Why are markets tumbling? You see, the Federal Reserve is going to have to join the money printing party once again. The Fed is the missing piece of the liquidity puzzle. After all, most all commodities are priced in U.S. Dollars. The strong U.S. Dollar is one of the primary reason for the weak oil and commodity prices that we are seeing at this time.
Everyone should forget further rate increases by the Federal Reserve. The fed is going to need to cut interest rates and eventually start another QE program to get these markets up around the world. Maybe this time the central bank to the world (Federal Reserve) won’t call it quantitative easing, but it’s going to need to do something if it wants these markets to stop deflating. In my humble opinion, QE-4 is around the corner.