The strength that the market had been showing throughout 2024 was based on confidence: central banks would be able to stabilize inflation without pushing the economy into recession. This idea was blown out of the water last week, and without this confidence, the market was suddenly exposed and saw the greatest turbulence since the collapse of Credit Suisse.
The task of central bankers this year is not simple: once the first blow of inflation has been contained, they must return interest rates to normal levels. But it is a difficult balance to strike: if action is taken too late, the economy cools and if it is done too soon, there is the risk of price rebounds.
The rise of the yen has undermined the Bank of Japan's strategy of borrowing in yen to invest in higher-yielding European and U.S. assets, the so-called carry trade. The losses caused by this formula are forcing investors to unwind their positions in risk assets, accelerating the correction of stock markets that were trading at very demanding multiples.
Market concentration (a handful of listed companies are responsible for the rises) and the strength of directional investments such as exchange-traded funds, or ETFs, also paved the way for a sudden correction.
#market-confidence #central-banks #inflation-containment #interest-rate-adjustments #stock-market-correction
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