Before Mr Bernanke spoke about the need to curtail and then stop Quantitative Easing the markets behaved as if there was no cloud in the investment sky. Since he spoke, they have behaved as if we would never see the investment sun again. Both positions seem unrealistic.
As the market declines have continued for longer, we need to ask could the markets talk and move themselves to a crisis? There is no immediate prospect of the kind of credit crunch and banking crisis in the west that drove the markets down in 2007-8. There is no-one forecasting a recession in the USA to match the crashes of the last decade. On that basis the Stock market reactions to higher bond yields looks overdone.
There are some problems out there which in its current mood the world Stock market takes more seriously. There is the trouble on the streets of Turkey and Brazil, once fast growing emerging market economies in favour. In China, still growing at more than 7%, suddenly the authorities seem to want to teach the banks and financial instituutions a lesson about controlling their lending instead of making easy liquidity available. Will they judge that right, or could they start to do damage to the very institutions which power and finance the growth?
Worse still, in Euroland, the markets are now driving up the cost of government borrowing again. For the time being Spain and Italy will have to pay 1% more to borrow, but the levels are still below the panic levels of the past. However, again market watchers will get more nervous if bond yields continue to rise, placing bigger question marks over the capacity of these governments to afford the money they need to raise from the bond markets.
The Uk has seen the 10 year cost of borrowing rise from 1.7% to 2.56% yesterday. It’s still low, but means a bit more cost to taxpayers as the government continues to expand its borrowing.
For the time being the markets worries have not done enough to interest rates and to the financial system to cause justified major worries. However, the more they slide, the more we need to look at the collateral damage it does. Mr Bernanke may be pleased with his work, as the US economy is strengthening and he needed to blow away some of the exuberance. He also seems to have knocked parts of the world like Euroland that are still struggling, and hit emerging market economies that are slowing anyway, which is not such a great result.