A bruising 48-hour sell-off in global stocks driven by fears of slowing growth has rocked market confidence in central bankers' ability to fight deflation, restore economic health and keep a six-year-old bull run going.
With the market mood still fragile, central banks appeared on Wednesday to be singing from the same soothing hymn sheet: U.S. Federal Reserve official William Dudley said hiking interest rates next month seemed less appropriate, while a European Central Bank executive board member said the ECB was ready to act if needed.
Their comments came a day after China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months, ratcheting up support for a stuttering economy and a plunging stock market that has sent shock waves around the globe.
But the reaction in markets was hardly euphoric. European equities closed in negative territory and while the U.S. S&P 500 was up 1.5 percent, it remains some 7.9 percent below end-2014 levels.
After six years of rising stock prices driven by easy central bank cash, investors are questioning whether further loosening of policy will be sufficient to fix a cooling market worried about growth.
"There is a feeling that central banks are running out of options," said Christian Gattiker, chief strategist at Julius Baer. "We are still on the brink of deflation."
Part of the problem is that while the market is betting that it is too early for the Federal Reserve to raise interest rates, it is also too early to expect the kind of coordinated response from central banks seen in the midst of market panics such as the 2008 crisis or the 2011 euro-zone meltdown.
Liquidity is not an issue right now, investors say, given recent fresh waves of stimulus from the ECB and the Bank of a Japan as well as years of rock-bottom U.S. interest rates.
"We had coordinated central bank action at the height of the crisis but I don't think we are at that stage now," said Ian Kernohan, economist at Royal London Asset Management.
"Is it the central banks' job to prop up markets all the time? Are we in a crisis, or are we just having a scare from weak China manufacturing data?"
The lack of impetus for a global emergency response has failed to contain calls for the Fed to consider further radical easing. Ray Dalio, founder of the world's largest hedge fund Bridgewater Associates, said this week he expected the central bank to head into quantitative easing once again.
The ECB, which only began its own QE program this year, is already raising the possibility of expanding it if necessary - even if investors for now think that unlikely.
But there is little evidence to suggest the reaction from markets would be one of jubilation if central banks turned on the cash spigots. Growth is fragile, sentiment is jumpy and deflationary pressures — one-year inflation swaps suggest the euro zone could be headed back towards a period of falling prices — are being stoked once again.
And all this after years of already lax monetary policy that drove the market boom.
"Further action can ease the stress and help to stabilize valuations," said Veronika Pechlaner, European equity fund manager at Ashburton. "But it can't give you a significant boost to growth. It can at least to some extent help markets to avoid a deflationary spiral, however."
Some said what they were looking for was confidence from companies, not central bankers, with investment thin on the ground.
"I don't think there is a liquidity problem," said Michele Patri, European equities portfolio manager at AllianceBernstein.
"It's about investment and capital expenditure, not just from big corporations but from SMEs (small businesses). They need to feel that it's time to start investing again."
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