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Investing.com – Bank failures, market turmoil and continued economic uncertainty, along with central banks fighting rising inflation, have increased the chances of a “Minsky moment,” according to Marko Kolanovic, an analyst at JPMorgan.
The term, named after the late American economist Hyman Minsky, refers to the end of an economic boom that encouraged investors to take so much risk that lending exceeded what borrowers could repay. At that point, a destabilizing event might force investors to sell assets for cash to pay off their loans, causing the market to crash. It refers to a sudden collapse in asset values, as a result of a sharp drop in market sentiment.
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“Even if central bankers succeed in containing the contagion, it appears credit conditions will tighten very quickly due to pressure from markets and regulators,” he added.
Kolanovic believes that the pressures in the financial markets will have an impact on monetary policy for some time to come.
In the past week, investors faced several US bank bailouts, market volatility, the collapse of Credit Suisse and the European Central Bank’s 50 basis point interest rate hike.
However, markets await the Fed’s policy decision on Wednesday and the choices it makes to address both the banking crisis and rising inflation.
“Even if central bankers succeed in containing the contagion, credit conditions appear to tighten more rapidly due to pressures from both markets and regulators,” a team of JP Morgan (NYSE:) strategists led by Kolanovic wrote Monday in a note to clients.
Analysts expect the Fed to choose to raise interest rates by a quarter point on Wednesday. While its strategists remain cautious about risky assets for now, sticking to their call that the first quarter will end up being the high point for stocks this year.
Kolanovic, chief global markets strategist at JPMorgan, was one of the biggest bulls on Wall Street last year, during most of the stock market sell-off.
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Michael Wilson of Morgan Stanley (NYSE:) said the strong pressures in the banking system could be the beginning of the end of the bear market in US stocks.
The strategist — who correctly predicted last year’s stock sell-off and recovery in October — wrote in a note. “We argue that a banking crisis would mark the beginning of the end of the bear market, as reduced availability of credit curtails growth outside the economy.”
The S&P 500 will remain unattractive until the equity risk premium rises to 400 basis points from the current 230 level, according to Wilson, who is known for being one of the strongest bears on Wall Street.
The collapse of the Silicon Valley bank and the sell-off in Credit Suisse shares raised concerns about the health of the global financial system this month, sending markets into turmoil. US stock futures fell on Monday after UBS’ agreement to buy Credit Suisse and moves by the central bank to boost dollar liquidity failed to assuage investor concerns about the health of the global banking system.
“This is exactly how bear markets end – an unexpected catalyst that forces market participants to acknowledge what was in front of them all along, that the bear market is over and it’s time for the bulls to come back,” Wilson wrote.
Ongoing turmoil in the banking system should prompt investors to focus on deteriorating growth prospects amid restrictive credit conditions, according to Wilson.
“The events of the past week mean that the availability of credit is declining for a broad swath of the economy, which may be the catalyst that finally convinces market participants that earnings estimates are too high,” he wrote, adding that credit crunch risks increased.
The expert recommends positioning in defensive sectors and stocks, while cautioning against the view that big tech stocks are immune to growth concerns.
Now he is confused and the markets are confused with him.. How will the dollar and bonds react to the interest decision now?
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