A major challenge ahead for the market is the transition central bankers policy. A few years ago the G-20 was fairly much in sync on their plan for aggressive stimulation, specifically quantitative easing (QE).
The difficulty for some was determining how and how much. Now, the disparity of policy is larger because some have little left in their arsenal to fight deflation, at any cost, and others took much longer to get a mechanism in place to do it.
Deflation, or currency devaluation, is just a method to adjust the value of stuff, whether the “stuff” is intellectual property or real estate, corporate stocks or food. Leverage can increase economic activity. Conversely, deleveraging slows it down.
The big question:
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So far, the conventional thinking is no. So, what should central bankers be doing? The Fed backed away from aggressive QE yet remains accommodative. Others reject QE and still others are still using QE.
Another big challenge is the regulatory response to the financial crisis. The general response is that more capital is needed through the financial system (aka reduce leverage, imagine that), which is overwhelming the correct response.
The process of establishing the capital rules can lead to significant unintended consequences. “Banks warn on new risk assessment models for trading operations” published in FT on May 25, 2015 addresses concerns being raised by the rules governing trading and that translate to capital requirements. The new risk assessment tools increase the liquidity troubles the market has already seen.