How Markets Need $200 Billion Each Quarter From Central Bankers
By Simon Kennedy Oct 21, 2014 7:18 AM ET
The central-bank put lives on.
Policy makers deny its existence, yet investors still reckon that whenever stocks and other risk assets take a tumble, the authorities will be there with calming words or economic stimulus to ensure the losses are limited.
A put option gives investors the right to sell their asset at a set price so the theory goes that central banks will ultimately provide a floor for falling asset markets to ensure they don’t take economies down with them.
Last week as markets swooned again, it was St. Louis Federal Reserve President James Bullard and Bank of England Chief Economist Andrew Haldane who did the trick. Bullard said the Fed should consider delaying the end of its bond-purchase program to halt a decline in inflation expectations, while Haldane said he’s less likely to vote for a U.K. rate increase than three months ago.
“These comments left markets with the impression that the ‘central-bank put’ is still in place,” Morgan Stanley currency strategists led by London-based Hans Redeker told clients in a report yesterday.
Matt King, global head of credit strategy at Citigroup Inc., and colleagues have put a price on how much liquidity central banks need to provide each quarter to stop markets from sliding.
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