Two days ago, post-2008 financial markets were disconnected from the US Federal Reserve (Fed)‘s Quantitative Easing (QE). The decision by governor Janet Yellen that the current policy of record-low interest rate would be maintained as long as necessary reassured so much that the rally up to the sky continues.
The announcement overnight by Haruhiko Kuroda, governor of the Bank of Japan (BoJ), to start a new quantitative easing program worth 80,000 billion yen (about $725 billion) prompted the japanese and US indexes to reach new records and to retrace more than 100% of early October’s correction. Also, the US economy went beyond the consensus in the third quarter of 2014 by delivering a 3.5% growth, the highest rate since 2003.
Longs gave an harsh lesson to shorts overwhelmed by these skyrocketing prices. Yet, paradoxically, the main reason behind the shorts’ strategy has been confirmed: financial markets react primarily to the policies led by central banks; this way ignoring somehow the macro-economic (and geopolitical) realities. Even quicker than the current increase, any disappointment, unexpected event or doubt (ie: inaccurate numbers regarding the Chinese economy) could floor it all.