Bad News Is Good News No More Amid Central Bank Doubts

Bad news for the global economy is once again bad news for stocks.

To Citigroup Inc.’s Steven Englander, that shows central bankers are running out of silver bullets on which investors can bet when confronted with downbeat economic information.

They got fresh reasons for pessimism yesterday with the biggest decline in German industrial production since 2009 and another revision of the outlook for global growth from the International Monetary Fund. With memories fading of last week’s report on U.S. job creation, stocks fell worldwide.

“The new information on global slowing may be less important than the realization that policy makers have few tools to deal with any kind of slowing let alone a major shock,” Englander, New York-based global head of Group of 10 foreign-exchange strategy, said in a report yesterday.

A three-day slide in the MSCI World Index to the lowest in more than five months highlights the turn in sentiment. At previous points in the recovery, evidence of poor economic growth often buoyed equities by prompting investors to anticipate fresh monetary stimulus -- hence, bad news became good news.

Take the U.S. employment reports of July, August and September 2013: They were all weaker than economists predicted, yet the Standard and Poor’s 500 Index rose after each release. The thinking was that the data would help postpone a withdrawal of stimulus by the Federal Reserve.

Low Rates

Now, interest rates have been at record lows for a while and central bank balance sheets are bloated from repeated rounds of quantitative easing. Even with scope to do more, the European Central Bank last week disappointed investors hoping for a bigger commitment to stimulus.

While Fed officials are indicating no hurry to raise rates, Englander said rather than calming investors such a message now only emphasize the “tentativeness of the recovery, the potential sensitivity to rate hikes, the possibility of negative shocks from abroad and the view that full normalization remains years away.”

These concerns will frame the discussions when finance chiefs flock to Washington for the IMF’s annual meetings this week. It will mean greater calls for fiscal support from the likes of Germany and for greater spending on infrastructure.

Worries that easy monetary policies “have done more to create over-valuation of asset prices than for economic recovery will linger on,” said Kit Juckes, global strategist at Societe Generale SA. “Of course, without drastic monetary action we might not have had recoveries in the U.S., Japan and the U.K. at all, but a period of equity market nervousness may be upon us.”

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