Crazy easing may put markets in tight corner

It is that time of the year when big banks look at how global financial markets performed in 2020 and what's up for 2021.

Chief Goldman Sachs credit strategist Lotfi Karoui released a summary report that began with the line, "it all happened within five weeks."

That refers to the stocks roller coaster from March to May when Covid hit.

Moreover, if we compare the 2008 financial tsunami with the rapid market rally caused by quantitative easing, the speed of the rebound is much faster in 2020 than that of the financial tsunami.

Karoui's conclusion was that central banks had "lost their way" by releasing money into credit markets this year to avoid a financial market meltdown.

There are several things noteworthy in his 20-point summary.

First, the world experienced the biggest roller-coaster ride in history.

Second, the outbreak pushed the market's microstructure to the brink of collapse as liquidity is so changeable that there can be great changes short term.

Third, the European Central Bank is continuing to invest in corporate bonds to the tune of 272 billion euros (HK$2.58 trillion), with monthly purchases averaging six billion euros, enough to absorb the bulk of net issuances.

Fourth, by end-November, delinquency rates for commercial mortgage-backed securities were close to financial crisis peaks, with hotels near 23 percent and retail properties near 12 percent.

That is a risk future economic and financial markets need to keep an eye on.

Luckily, due to US Federal Reserve intervention, US real estate price drops were limited to less than 5 percent

Fifth, new issuance in the US dollar corporate bond market hit a record high.

Sixth, the V-shaped recovery of merger and acquisition activity reflects the situation that the market appears to hit the weak and leave the strong untouched.

Seventh, despite the recession's severity, prices are still rising at an annual rate of more than 15 percent, according to the US home price index, either because demand is outstripping supply or because the Fed has provided ample liquidity.

Thus, quantitative easing, especially in Europe and the United States, has distorted the stock market, or even the prices of corporate bonds and properties.

That will trigger a big problem, which is if central banks in future fail to effectively control and reduce sequela brought about by quantitative easing, then not only will stock, bond and real estate markets be likely to see rapid adjustments, and that brings serious systemic risk to financial markets in the future.

Andrew Wong is chairman and CEO of Anli Securities