Once in a while, we like to step back from the binary options industry in order to provide you with a wider prospect of what is going on in the market as well as investors positioning. Last week, more than 1’300 professionals fund managers gathered in Berlin for the FundForum in order to discuss the current investment outlook and prospects for the economy. Most of the the discussions were focused on the potential negative impacts of Central Banks’ monetary policy and the negative interests they have produced over the years. We would like to take a moment in order to explain you what it means.
What are Central Banks monetary policy?
After the financial crisis of 2008 that was mainly triggered by the Lehman Brokthers bankruptcy, the US Central Bank stepped in to try and limit the impact of the crisis. They started to significantly lower interest rates and even intervene on the bond market by injecting liquidity. The Central Bank was trying to foster corporate credit and consumer consumption by facilitating the access to ultra cheap loans. This is what is often refereed to as Quantitative easing in the financial press. However, now almost eight years after the financial crises, the ultra aggressive monetary policy still hasn’t adequately boosted economic growth (even though the US have been somewhat showing signs of improvement in unemployment and production activity).
Why investors are starting to worry about quantitative easing and negative interest rates
Top investors are now worried that Central Banks may end up trapped in their own game. We are at a point where sovereign rates (the rates applied to countries’ debts) are closed to their lowest levels in history why the US equity markets is close to its all-time high. As former PIMCO chief executive Mohamed El-Erian recently pointed out: “Think of central banks like a doctor. They’re walking by, they see their patient—the global economy—in trouble. They will not walk away from the patient. They are wired to respond even if they don’t have the right medication,” he said. “What happens when you respond for a very long time with the wrong medication? You start worrying about side effects, you start worrying about unintended consequences. That is where we are today.”
Central Banks all around the world have been following in the footsteps of the Fed with quantitative easing programs implemented in Europe, China and Japan. The European Central Bank was set Wednesday to begin purchasing corporate bonds as it expands the scope of its asset-buying program, turning its monetary policy even more aggressive. What top investors are really worried about is what they call a “Policy mistake”. A “policy mistake” could come in the form of the Central Banks raising interest rates too fast or Central Banks keeping rates in negative for too long. This is the reason why many investors fear that Central Banks may end up trapped between these two alternatives.
Volatility is likely to increase for the wear ahead
You can look at this problem from two different perspectives. You can start to worry like most fund managers that need to be structurally long, or you can see this as a trading opportunity. Binary options are extremely useful in times of high volatility as they allow you to quickly capture the extreme moves of the different markets. You can decide to go long or short at any time of the day and benefit from the growing uncertainty surrounding the market.
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