Vol 10 (2013) - Issue 3

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Why the Risk Rally Remains Resilient

Some market participants have argued that central bank liquidity distorts credit markets, suppresses near-term risks and adds to long-term risks. Financial stability may be threatened. While markets have turned sensitive to disappointing growth data, the risk appetite set-back has proven to be temporary. We cite at least four reasons why the risk rally is set to remain resilient:
(1) Evidence of rapid credit growth or massive leverage build-up that would threaten financial stability is scant. Credit demand is still relatively moderate (Exhibit 1), as private sector de-leveraging is still in place, albeit at a far slower rate than merely 12 months ago.