Can central banks continue rescuing markets?

IT'S interesting to contemplate Friday's rally, coming as it did on the last trading day of January and after the Bank of Japan (BOJ) opened its monetary taps yet again, shifting interest rates into negative territory.

The momentum of that window- dressing push is unlikely to last, so the start of this week is likely to be more sedate. Beyond that the question is whether markets will continue responding to central bank support as they have from 2008-2014, or whether the effect of monetary injections will become increasingly short-lived. This question has significance since after the BOJ, there are expectations of more stimulus from the People's Bank of China (which could come at any time) and the European Central Bank (ECB) in March.

In this connection, Rabobank on Friday in a comment "Stuck in a money-go-round" discussed three scenarios in which loose money pushes up asset prices that then grow more disconnected with the fundamental backdrop: "1) fundamentals finally improve thereby justifying risky asset valuations thereby seeing this disconnect closed as bond yields rise; 2) fundamentals do not improve and, as a consequence, risky assets are sold and the disconnect is closed as equities are sold; or, 3) fundamentals do not improve but owing to the political difficulty in standing by and allowing equities to collapse we see more of the same 'bad medicine' in the form of yet more monetary policy stimulus''.