Foreign media commentators believe that while global stock markets continue to rise driven by the AI boom, the "policy support" that investors have tacitly accepted for many years is weakening. With inflation, interest rates, and government debt remaining high, central banks and fiscal authorities have less room to intervene and stabilize the market when it is under pressure than in the past.
The market rebound still relies on old expectations.
Mohamed El-Erian, chief economic advisor at Allianz and chairman of Gramercy Funds Management, wrote in the Financial Times that over the past few decades, market crashes have often been followed by monetary or fiscal support, an experience that has gradually shaped investor expectations.
The article states that this expectation leads many investors to view volatility as a buying opportunity rather than a signal of fundamental changes. The recent rapid stock market rebound following the outbreak of the Iran war is seen as evidence that this psychology is still at play. Even though the Strait of Hormuz remains effectively blocked, risk appetite has not significantly subsided.
High inflation reduces policy space
The article argues that the market is currently supported by rising AI-related stocks and large tech companies' multi-billion dollar capital expenditure plans. However, pressures such as weakening real income and declining consumer confidence have not disappeared.
More importantly, persistently high inflation, high interest rates, and ever-increasing government debt are weakening policymakers' ability to address downside risks. El-Erian argues that while policymakers may not have lost the will to support the economy, their capacity to do so has diminished.
Several Federal Reserve officials have recently reiterated the stickiness of inflation, indicating that further tightening of policy remains an option if price pressures cannot be eased. Central banks in Japan and Europe are also wary of the spillover effects of rising energy prices.
The bond market begins to constrain fiscal policy.
On the fiscal front, the article states that most developed economies have less room to continue relying on deeper deficits to expand spending. Rising borrowing costs will directly increase government interest payments, while an economic slowdown could depress tax revenues, making the fiscal pressure even more pronounced.
The article also mentions that recent weak demand at some U.S. Treasury auctions reflects investor concerns about widening deficits, rising debt interest burdens, and increased defense spending plans. As bond investors become more sensitive to fiscal discipline, it is becoming increasingly difficult for the government to continuously prop up the economy and markets through bond issuance.
If a recession occurs in the future, the US may need to issue more new debt at higher yields, further increasing the interest burden and potentially accumulating fiscal pressure. At the same time, the Federal Reserve may face a greater tug-of-war between curbing inflation and stabilizing employment.
Additional information:The article summarizes this change as the global economy entering a "turbulent structural recalibration." The author argues that with traditional support measures weakening, policymakers are more likely to shift towards productivity gains driven by AI, deeper capital markets, and more targeted fiscal arrangements.
