June 30, 2017 / 12:41 PM / 3 months ago

Spectre of old normal gives investors a fright

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., June 29, 2017. REUTERS/Lucas Jackson

LONDON (Reuters Breakingviews) - In early 2009, fund managers at PIMCO coined the term “new normal” to describe the post-crisis financial landscape. Their projection of sluggish growth, subdued inflation and rock-bottom interest rates proved a reliable guide for most of the next eight years. Now markets are taking fright over a hint that that period is coming to an end.

It has been clear for a while that the world economy is doing a bit better. The International Monetary Fund expects global GDP growth to hit 3.5 percent this year. Fears that a financial crisis could trigger a slump in China have receded for now. Economic sentiment in the euro zone, as measured by the European Commission, is at its highest level in almost a decade.

Yet the prospect of central banks responding to that improvement has still taken money managers by surprise. Euro zone bond yields jumped this week after investors interpreted comments from European Central Bank President Mario Draghi as slightly more hawkish. The prospect of money becoming more expensive has also weighed on equities: the pan-European STOXX index is down 2 percent this month.

The notion that stronger growth can lead to lower share prices is a reminder of how distorted markets are. Loose money has not only pushed down government bond yields, but also reduced borrowing costs for companies and consumers. Low interest rates may also have made investors more willing to pay up for stocks that promise future earnings growth, or pay out generous dividends.

It’s too early to declare the “new normal” era over. After all, the ECB is still spending 60 billion euros a month buying bonds. And though the yield on 10-year German government bonds has jumped from 0.24 percent to 0.46 percent in less than a week, it remains lower than at the beginning of 2016.

Signs of a revival could also prove false. Hopes that President Donald Trump’s election last November would lead to growth-boosting tax cuts and spending on infrastructure have largely faded. Central banks know tightening monetary policy too quickly could knock markets, and in turn the confidence of consumers and companies. Nevertheless, the touchstones of the post-crisis era are wobbling. Investors will need to get used to the view from under the bed.

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