Financial markets not playing their role because of central banks - Natixis

Patrick Artus, Research Analyst at Natixis, suggests that the highly expansionary monetary policies conducted (examples of the United States and the euro zone) have led to an abnormal rise in market prices of financial assets (bonds, equities), a distortion of relative prices between financial assets (according to whether or not they are purchased by central banks) and squeezing of risk premia (options, peripheral euro-zone bonds, corporate bonds).

Key Quotes

“As a result of these effects of monetary policies, financial markets no longer play their role, as equilibrium financial asset prices no longer reflect:

• The real value of the underlying assets;
• Growth prospects;
• Borrower default risk (companies, governments) or the risk of variability in company results.”

“It does not seem that central banks take into account this microeconomic cost (equilibrium prices in financial markets no longer provide relevant information).”