Central bankers make it harder to time global recovery

Asian markets have enjoyed something of a rally during the first quarter of 2012, but our readers are unconvinced. In last week’s web poll, most respondents said they are “not confident” that the global economy is on a path to recovery.

It is perhaps not surprising that few people have much faith in the rally. Massive intervention by central banks around the world during the past four years has flooded markets with liquidity and, in certain corners of the financial system, such easy money has driven prices to nonsensical levels.

According to Macquarie, Asian sovereign bonds are no longer an investment but an expense — which is to say that, after inflation, investors are paying for the privilege of holding them. And, with oil prices on the rise, inflation is once again a looming problem in the region.

“Oil drifting higher poses two seemingly contradictory challenges for Asia,” said Frederic Neumann, co-head of Asian economics research at HSBC, in a note yesterday, pointing to the twin perils of weaker demand for Asian exports in the West and the effect of rising energy costs on Asian inflation.

“Across the region, food prices tend to rise with a lag in response to oil. And food matters hugely for regional inflation. We need crude to come down,” he said.

Surprisingly, stock markets have also enjoyed a strong rebound since the start of the year. There was once a time when bond yields and stock markets were considered to be mirrors of each other — when bonds paid more, stocks paid less; and vice versa. But that logic no longer holds.

In such conditions, it is better to be an opportunistic trader than a fundamentalist investor, because economic indicators do not always make sense when global markets are awash in easy money.

Indeed, looking for signals in the news flow is hardly worth bothering with these days. Chinese economic data released last week showed a marked slowdown in growth during the first quarter, but Hong Kong’s Hang Seng Index quickly recovered from the blow and has risen for the past three days. In the eurozone, nobody believes that Greece’s successful debt exchange is about to make it solvent, but an injection of liquidity by the European Central Bank has helped to drive up asset prices nevertheless.

Of course, this is not completely unusual. Markets are most difficult to predict when they are on the turn — for the worse or for the better. Economists can easily look at the same datasets and derive opposite conclusions about the prospects for growth, which is what most of them seem to be doing.

Likewise, respondents to our poll were hardly unanimous. Almost as many were “confident” as “not confident” of an economic recovery around the corner. Choosing whom to believe is anyone’s guess.