Global equities at record highs, credit spreads at record lows and interest rates well below long term averages suggest a financial assets bubble driven by low inflation and ultra loose central bank policies. Central banks are in no hurry to tighten policy and that will keep asset prices high, especially for equities.
Physical assets valuations are still well below levels seen in 2007, with oil and industrial metals sharply down from highs. Inflation has been muted largely due to low commodity prices. Gold prices have not risen after falling sharply from highs seen in 2011, indicating that markets are still not seeing any bubble burst on the horizon.
Currency markets suggest that risk aversion is low with currencies such as the Euro coming out stronger after the debt crisis a few years ago. Asian currencies are riding out all storms of Fed rate hikes given their improved current account positions. View our Video on Asian Currencies are Well Placed to Ride Out Crisis.
Janet Yellen the Fed Chair, in a recent testimony to Congress said that the Fed is still wary of falling inflation expectations despite low unemployment rate and tight job market. Wage growth has not given a cause for concern and Fed will go slow on rate hikes.
ECB President Mario Draghi has also maintained that the ECB will stay highly accommodative until it sees a sustainable rise in inflation. While 10 year US and Eurozone bond yields have risen from lows, yields are well below highs seen 10 years back.
Global economic data too suggest that inflation is staying down even as economic indicators including manufacturing indices are picking up. Low inflation, moderate growth, loose central bank policy are all strong feeders for sustained rise in financial assets valuations.