Mind the Gap

Economic fundamentals (the “real economy”) have been struggling to catch up with the buoyant behavior of financial markets and, eventually, these diverging patterns (gaps) will have to be reconciled. On the economic side, the main global structural imbalances (a mountain of debt, a lack of aggregate demand) remain very much in place and the multiple transitions that all the major economic areas are facing are far from being completed. The recent market dynamics would be inconceivable in a “normal” market cycle, but nothing is impossible in the fantastic world of Quantitative Easing (QE) and money printing. Continue reading

The FOMC Holds Steady as Markets Hit a “Tipping Point”

 

Observations on the Capital Markets – Week Ended August 1, 2014

The FOMC met last week, expressed satisfaction and maintained course. While their policy decisions (continue the taper—now $25b—and keep the Fed Funds rate where it is) were no surprise, the language of the Fed statement was tweaked to reflect the continued/continuing improvement in the economy and labor markets (e.g.: “the likelihood of inflation running persistently below 2% has diminished somewhat”).  The Fed feels it is accomplishing its goal…so a continuation of policy normalization is appropriate.

At the same time, the Fed statement said “…a range of labor market indicators suggests that there remains significant underutilization of labor resources.” Analysis: the Yellen Fed is moving cautiously…with Japan and Europe still weak, the Fed appears willing to risk an inflationary boom in the U.S. to minimize the likelihood of having to fight a recession and/or deflation when it has a bloated balance sheet and low Fed Funds rate, but very robust tools to fight inflation.  As I said on CNBC last week, a submarine commander doesn’t give the order to submerge when most of the hatches are closed.

Continue reading

EM Update: Central Banks & Monetary Policies

Pioneer’s Head of Global Asset Allocation Research, Monica Defend, recently released an in-depth macro report on Emerging Markets. Here are some of her updates on EM monetary policies. You will find a link to the full report at the end.


ASIA

  • China – The implementation of fiscal reform is proceeding as ten local governments will be allowed to issue bonds with full responsibility of repayment. Even though the economic slowdown would suggest a stronger monetary easing, in the ongoing process of liberating interest rates and increasing efficiency in credit allocation, monetary policy must remain prudent to prevent a return to the old model of allocation and growth. The latest reserve requirement ratio cut for some qualified banks supports this attitude of the People’s Bank of China.

Continue reading

An Accommodative Fed and a Strengthening Economy Outweighed Geopolitical Fears

Observations on the Capital Markets – Week Ended June 20, 2014

Iraq news didn’t spark a flight to safety and it’s not yet clear whose side we’re on (or should be on). Fed policy seems to be on autopilot, which the markets interpret as dovish. As expected from last week’s FOMC meeting, there was no change to the taper pace or rate policy. The statement’s wording and forecasts were tweaked only slightly from the previous. Higher inflation readings and stronger labor market data didn’t lead to a material change in the language.  For the Fed to react so little to the labor and inflation data apparently led “the market” to think the Fed is even more dovish. The market apparently expects the Fed to be even more dovish than the Fed expects to be. December Fed Fund futures are trading around 1.75%‑well below the Fed’s 2.5% projection. Continue reading

Markets are Unfazed as War Risks Escalate

The Capital Markets Were Very Calm Last Week, Considering The Rising War Risks

  • Equities:  After three strong weeks, the S&P 500 ended the week down 0.7%.  Higher oil prices boosted the index’s Energy sector to a 1.7% return; while all other index sectors declined.  MSCI Europe touched six-year highs mid-week but also ended down slightly less than 1%; MSCI Japan and Emerging Markets were up slightly.
  • Bonds:  The 10-year Treasury’s yield ended unchanged at 2.60%; the 10-year TIP yield rose 1 basis point (bp) to 0.41%.  The BoA Merrill Lynch High Yield index touched new cycle lows mid-week, ending 5 bps tighter at 3.47%.  European bond markets were calm.
  • Commodities: WTI was up $4.10 for the week, to $106.87 on war fears (Iraq is OPEC’s second-largest producer).  Gold was up about 2%.
  • Currencies:  The Chinese yuan and Japanese yen each rose about 0.5% against the dollar; the euro was down almost 1%.

A Black Swan Emerges In Iraq

A week ago, ISIS (Islamic State in Iraq and Syria) in Iraq was off the radar of the news media and market strategists.  It has suddenly emerged from the northwest of Iraq, which borders Syria, as a significant threat to the global economy (higher risk of a recession-causing an oil price spike). ISIS, a non-state Sunni militia and major player in the Syrian civil war, turned east (from Damascus to Baghdad), capturing several key Iraqi cities including Mosul, the nation’s second-largest. The Iraqi army apparently collapsed; Baghdad itself is perceived as threatened.  Continue reading

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

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