An important article by Gavyn Davies on his Financial Times blog analyses the effects of US quantitative easing (QE) on bond, share and commodity markets and the relation of these to trends in the productive economy.
Gavyn Davies charts the graph in Figure 1.
His commentary is self-explanatory:
‘A quick glance at the graph suggests that equities, bonds and commodities have all been in bull market trends ever since the successive rounds of quantitative easing started. However, a closer inspection reveals that this is not in fact the case. Only bonds have been in a continuous uptrend. The behaviour of global equities and commodities can more meaningfully be split into two separate phases.
‘From the start of the recovery to the end of April 2011, both equities and commodities recorded extremely strong bull markets, with both asset classes rising by some 90 per cent.
‘Since then, however, the bull market in risk assets has fizzled out. In the second phase (shaded blue), equities have been volatile around a broadly flat trend, and commodities have actually fallen by 16 per cent from the peak, despite their recent rally. Quantitative easing has not been powerful enough, at least up to now, to restore the 2009-11 bull market.’
As regards bond markets the essentially continuous upward trend of prices noted by Gavyn Davies naturally indicates that the intended goal of QE of depressing interest rates has been achieved. As regards commodity prices he is accurate that these have not yet regained their post-financial crisis peaks reached in April 2011 – as is clear from Figure 2.
World share prices have also not significantly risen above their April 2011 post-international financial crisis highs – see Figure 3. However this graph also illustrates the sharp difference between US and non-US share price performance.
US shares have continued to advance since April 2011, more than overcoming their decline in the second half of 2011. Non-US shares have, however, fallen back from April 2011 levels.
Whereas up to April 2011 US and non-US share markets moved in the same direction, both showing recovery, since April 2011 US and non-US share markets have moved in opposite directions with the former having risen and the latter fallen.
In order to illustrate this more clearly Figure 4 shows the changes in world, US and non-US share prices since 31 March 2011. By 21 September US share prices were 9.9% above their 31 March 2011 levels whereas non-US share prices were 9.2% below them.
These contrary trends in US and non-US share prices naturally don't contradict Gavyn Davies’s fundamental argument. But they highlight an important trend within its overall framework.
US QE policies have been accompanied by, almost certainly caused, a significant and continuing rise in US share prices which continued after April 2011. But US QE policies have been accompanied since April 2011 by a fall in non-US share prices. Any analysis of trends in world markets must take into account and explain these divergent trends.
It is also unlikely that the explanation can simply be more rapid economic growth in the US compared to other economies . Despite some recent slowdowns emerging economies have grown significantly more rapidly than the US, but emerging economy share prices have performed significantly worse than the US – Figure 5. Whereas emerging economy share prices have fallen by 14.2% since 31 March 2011 US shares have risen by 9.9%.
The Federal Reserve could, therefore, argue that it has created a ‘wealth effect’ within the US through QE – US house prices have also stabilised and then risen slightly this year. However the data from commodity markets and non-US share markets indicates no such effect has been created by QE outside the US.
Whether US QE has contributed to the negative trends in non-US economies, as countries such as Brazil have argued, would of course requires a separate article. The distinction between US and non-US markets is however relatively clear.