The announcement last week by the European Central Bank (ECB) that it was going to front-load asset purchases under its quantitative easing program was another revealing insight into the state of global financial markets. It underscored their volatility and the lack of any overall plan by the financial authorities, supposedly in charge, who rush from one trouble spot to another as they seek to prevent the eruption of another crisis.
The decision to step up purchases in May and June came in response to a major fall-off in German 10-year bonds, Bunds. Their yield, which moves in an inverse relationship to the price, jumped from near zero to above 0.55 percent in a matter of a few days.
Announcing the decision last Monday, ECB executive board member Benoit Coeuré said it was not the reversal in the price of Bunds and other sovereign bonds that was of concern but the speed with which it took place as it was another sign of “extreme volatility” and “reduced liquidity.” In other words, the ECB feared that if the sell-off gathered momentum it could be the start of a major crisis and hence it was necessary to step in.
The reaction in financial markets to the promise of enhanced funding from the ECB pointed to the escalation of parasitism which has become the central feature of financial markets and indeed the global economy more broadly.
Notwithstanding concerns that the US economy is not going to rebound in the second quarter—after a growth rate of only 0.2 percent in the first quarter, a figure that may even be revised down—continuing stagnation in Europe and the ever-increasing signs of a significant downturn in China, financial markets celebrated. The key Wall Street index, the S&P 500, experienced two record highs last week, with the Dow industrials index also touching a record on one day.