CNBC: Central Banks are Creating 'Fake Markets,' Bank of America Strategists Say

May 22, 2020

Article by Elliot Smith in CNBC financial

Stocks have become detached from reality due to recent interventions from central banks into the bond markets, according to analysts at Bank of America.

In a research note Friday, the Bank of America Securities division highlighted the question of why the stock market is so divorced from reality as one of the most frequently asked by investors.

Despite the economic crisis brought about by the coronavirus pandemic, which has so far seen 38 million Americans file for unemployment and brought about sharp contractions in global GDP (gross domestic product), risk assets have been rallying of late.

Chief Investment Strategist Michael Hartnett set out a number of key reasons for this unmooring of stocks, the first of which was the emergence of “fake markets.”

“Government and corporate bond prices have been fixed by central banks ... why would anyone expect stocks to price rationally?” Hartnett said.

Central banks have deployed a total of around $4 trillion of asset purchases over the past eight weeks, Hartnett highlighted, and the global equity market cap has surged by $15 trillion.

In the same period, central banks have been buying $2.4 billion per hour of financial assets, which Bank of America strategists expect will fade to $608 million in the coming weeks.

Hartnett suggested that overall market positioning is still bearish with policymakers causing an “immoral hazard” which will force investors to buy, banks to lend and corporate “zombies” to issue debt in 2020.

Zombie companies are those which make just enough money to continue operations and service debt, but hold little to no excess capital and are unable to pay off their debt.

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