Equities Quietly Rallied; Bond Markets were Quiet

We’ll start this week with some market trivia – Roughly 150 of the stocks in the S&P 500 yield more than the 10-year Treasury. Continue reading

Why Did Treasury Bonds Rally So Much?

U.S. Treasuries rallied last week, pushing yields to new 2014 lows – but why did it happen?  War fears seem an unlikely explanation: gold and oil were well-behaved, and equities were flattish.U.S. economic fears couldn’t explain it – the data wasn’t bad – but low Eurozone GDP growth might have contributed. The trading desk buzz is that we’re seeing a short squeeze – there just aren’t enough bonds to go around. Continue reading

Time to Reassess the Emerging Markets Landscape?

The last decade may well be remembered as the golden era for Emerging Markets (EM). These economies emerged from the crisis of the 90s and experienced a success story of restructuring and strong growth early in the millennium. Cheap labor markets and massive capital inflows, along with extraordinarily loose monetary policies put in place globally to fight recession, were behind the EM renaissance. Continue reading

Russia Smiles . . . Or Maybe Bares Its Teeth

 Observations on the Capital Markets – Week Ended May 9, 2014

On Thursday, Putin suggested the separatists postpone their vote (a suggestion they appear to have ignored). He also said Russia had pulled troops back from the Ukrainian order (NATO said no such pullback had occurred). Finally, Putin also called for a ceasefire and talks between the new government and separatists on equal terms . . . a move which would effectively confer recognition on the separatists. Markets—notably the Russian stock market—rallied on this hint of peaceful behavior.

Nevertheless, the separatists have said they intend to push forward with a May 11 “independence referendum.” Independent polls suggest that the majority of the local populations do not favor secession but, inasmuch as the separatists are likely to collect ballots only in areas they control, that they are likely to present at the polling booths, and that no impartial authority will be counting the ballots, a small actual turnout, a high reported turnout, and a pro-secession vote are likely outcomes.

On Friday, Russia commemorated Victory (over Hitler) Day . . . it’s a very big holiday in Russia—think July 4. On Friday, Russia apparently also conducted military drills—not on the Ukrainian border, but across Russia—simulating (with ICBMs and strategic bombers) the ramp-up to global nuclear war. Was it routine and pre-planned, as they say, or a threat of escalation? You decide. Continue reading

Weak GDP Growth and Falling Unemployment? Believe Neither Report

First quarter GDP rose 0.1% (annualized), which was well short of market expectations. But don’t get excited – this is a backward looking indicator. Q2 is already 2/3 over and it’s looking a lot stronger than the prior quarter and winter months. Employment in particular looks solid, but a raft of other data points to building strength.

A few points to consider:

  • GDP will be revised twice, and the final number is likely to be significantly different than 0.1%.
  • Trend growth is still improving: trailing 12-month growth is 2.3%, versus 1.3% at the end of Q1 2013.
  • Easter was late. A late Easter pulls activity from 1Q into 2Q.
  • Hours worked fell in Q1 due to bad weather. If hours worked had not fallen, Q1 growth would have been about 2.5%.

Continue reading

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