A Different Perspective
Asking the Right Questions
Weekly Market Recap: September 8th 2014
Market Recap
The story of the week was the ECB’s unexpected decision to reduce policy rates while confirming that they will soon purchase Asset Backed Securities (ABS) and covered bonds. The Euro weakened against most of the major currencies finishing the week at $1.296, falling below $1.30 for the first time in over a year after been near $1.40 earlier in the summer. European equity markets increased while peripheral European bond spreads continued to tighten, with the difference between 10-year Irish and German government bond yields finishing the week at just 0.70%. In the US, equity markets shrugged off poor employment data released Friday to close at an all-time high, up 0.22%, with markets also buoyed by a reported ceasefire in Ukraine.
The growing support for Scottish independence weighed on Sterling last week. A poll released on Sunday put the “Yes” campaign in the lead for the first time, overturning a 22-point lead in the space of a month. What was recently considered a distant possibility is now looking like more of a coin flip with the result likely to come down to which side can get their supporters to the polls in ten days’ time! Speculation is rife that Alex Salmond, Leader of the Scottish National Party, is set to unleash his most potent political weapon to secure Scottish independence; large screens are to be set up in every town and city across Scotland with the movie Braveheart on repeat!
Week Ahead
European equity markets have opened marginally lower following a mixed session in Asia overnight. On the macro front this week, there are reports on industrial production and inflation from around the globe. In the US we will get an update on the all-important consumer on Friday with the latest retail sales data and the University of Michigan Consumer Confidence Survey. Employment data from the UK on Wednesday will provide an update on the labour market, a key determinant of the Bank of England’s monetary policy. On the Central Bank front, the minutes from the most recent monetary policy meetings at the Bank of England and the Bank of Japan will be released. Over the weekend China will report on industrial production, retail sales and fixed asset investment.
We can also look forward to the return of the premier league this weekend after being made to suffer through the international football. A week of listening to England’s current and ex-players wax lyrical on why Wayne Rooney makes the perfect England captain is enough for anyone!
European Central Bank: New Policy Measures
The European Central Bank was centre stage last week with their latest monetary policy announcement. It was only last night that I got a chance to watch his full press conference, after the Ireland match. I can say both were on par in terms of entertainment, bar some McGeady magic, but to me it also looks like Mario Draghi pulled a masterstroke in the expectations game with financial markets. Aware that he was under significant pressure to do more, against a backdrop of weak inflation and growth dynamics, Draghi surprised and appeased markets without actually doing that much.
Interest Rate Cuts: “Now we are at the Lower Bound”
The ECB made a surprise cut of 10 basis points to all three interest rates, with the rates on their main refinancing operations, the marginal lending facility rate and the deposit facility rates now standing at 0.05%, 0.30% and -0.20% respectively. (As a reminder, the negative deposit rate applies to cash held with the ECB in excess of the minimum reserve requirements, in essence a levy on banks to motivate additional lending). As Draghi said, interest rates were already “for all practical purposes at the lower bound, but technical adjustments could be possible”. These cuts are just technical adjustments, and it seems unreasonable to believe that it will have any marginal impact on easing credit conditions in the real economy.
Outright Purchases of Asset Backed Securities & Covered Bonds
The Eurosystem will purchase a broad portfolio of “simple and transparent asset-backed securities (ABSs)” with underlying claims linked to non-financial private sector debt under a new ABS purchase programme. They will also purchase “euro-denominated covered bonds issued by MFIs domiciled in the euro area” under a new covered bond purchase programme.
Forward Guidance & “Additional Unconventional Instruments”
As well as strengthening their commitment to forward guidance, i.e. keeping rates lower for longer, the ECB once again reaffirmed that the “Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate”. The ECB are moving closer to the limits of their mandate, with uncertainty still hanging over whether they can actually purchase government bonds within the current mandate. Still, his comments alone are enough to convince markets that the ECB could yet embark on a large scale government bond buying programme, akin to the other major central banks.
Conclusion: The latest package of measures was received well by financial markets, the typical pavlovian response to monetary stimulus that we have observed over the last five years. However, whether it will be enough to boost the ailing Eurozone economy remains to be seen. Overall, while the ECB is making every effort to support the recovery, monetary policy will be ineffective without structural reform while fiscal policy will also have to play its part. This was the key message from Mario Draghi’s press conference, one that will most likely be ignored!
“Why the Ice Bucket Challenge Worked”
The Ice Bucket Challenge has taken the world by storm, blocking up social media news feeds everywhere. In fairness, nobody can argue with how successful and worthwhile it has been, reportedly raising $100 million for the ALS association who fight against Lou Gehrig’s disease. However, this article – “Why the Ice Bucket Challenge Worked” – is an interesting take on why so many people have taken part. The writer’s simple explanation: “It created a safe environment in which people could display their altruism.”
Transfer deadline day
It’s transfer deadline day in the English Premier League, an entertaining reminder of the craziness in world football but also the day we see what clubs are pressing the panic button. One man with his finger firmly on the button is Manchester United’s Luis Van Gaal, the man with a “philosophy” but also the ego to consistently refer to himself in the third person. Still I suppose things must be really bad when you are not shocked by a 4-0 humiliation to third tier MK Dons! Wait till he comes to Anfield, the shock he’ll get! Liverpool’s performance yesterday in a 3-0 win over Spurs, again made to look like a Sunday league team, is a warning to all of the doubters delighting in our defeat to Manchester City Monday night; the loss of Luis Suarez will not halt Liverpool’s return to the glory years….
Market Recap: September 1st 2014
The major equity indices in Europe and the US moved higher last week while the performance in Asia was mixed. The French CAC 40 equity index was one of the standout performers, up 3.02% for the week, pushing the index back into positive territory for the year. In the US, the S&P 500 capped off the best August in fourteen years, closing at a new record high of 2003.37.
While August was a strong month for equity markets, the insatiable demand for government bonds also showed no signs of easing. The German 10-Year government bond yield fell further, down 9bps to 0.89%! At the same time the spreads on other Eurozone government bonds continued to narrow with the 10 year bond yields in France, Italy, Spain and Ireland declining to 1.25%, 2.44%, 2.23% and 1.78% respectively.
The dichotomy between equity and bond markets can only really be explained by an underwhelming economic recovery, weak inflation and most of all the ever increasing influence of the world’s major central banks. The cacophony of voices is growing louder for the European Central Bank to step up to the plate and embark on a program of quantitative easing. However, against this backdrop even the most ardent of equity market bulls would have to be somewhat wary as we head into September, historically a more challenging month for stock markets.
Week Ahead
European equity markets have opened lower this morning following after a worse than expected PMI manufacturing survey added to concern about the trajectory of the Eurozone economy. US markets are closed for the Labour Day holiday.
It is a busy week on the economic front this week. Key macro data includes purchasing manager index (PMI) reports from around the globe, lending data from the UK, industrial production from Germany, and the second estimate of Q2 Euro-area GDP. The US employment situation report on Friday will be keenly watched, with the labour market “yet to fully recover”, according to the Fed’s Janet Yellen.
Also in focus this week will be the monetary policy announcements from the European Central Bank, Bank of England, Bank of Japan and the Bank of Canada. No change in policy is expected at these meetings but the BOJ and the ECB are being asked to do more. In his press conference following the announcement, Mario Draghi will be pressed further on deflation risk and how their work on the purchase of asset backed securities has progressed.
“Investment Advice from a Mob Boss”
CNBC, the business news channel, can make for painful watching most of the time. I usually keep it on mute, particularly for the US Squawk box show. However, this interview with Michael Franzene, former mob boss for the Colombo crime family in New York, is a break from their usual guests and is worth a watch for its entertainment value. The giddiness of the interviewers is cringe worthy to say the least, awe stuck by a mobster who has “found god”. Whatever about his advice to buy gold and silver, one can’t argue with his caveat on diversification: “You have to have knowledge of what you’re diversifying in”. Oh, and don’t trust “Wall Steet guys”, the real wise guys!
Would the real “Super Mario” please stand up?
In financial markets, it is Mario Draghi, the monotone Italian that heads the European Central Bank, who has earned the nickname “Super Mario”. However, another Italian, more befitting to the name “Super Mario”, has Liverpool fans including myself much more excited, the enigmatic Mario Balotelli. In a world of central bank largesse and easy money, £16 million for a proven goal scorer in England, Italy and on the international stage is a bargain. Of course with any investment there is risk. The real question is whether you understand the risk, can it be managed and does the potential reward sufficiently outweigh the potential costs of making that investment. Remember, it is the mispricing of risk where opportunities are created!
In the case of Balotelli, the current valuation reflects the market’s perception that he is high risk, a potentially disruptive influence. While Balotelli has yet to bite anyone he is prone to moments of madness. At Manchester City, Roberto Mancini once said “I don’t speak with him every day because otherwise I would need a psychologist”. Liverpool manager Brendan Rodgers sees an opportunity though, confident in his own ability to reform so-called ‘difficult’ strikers, following his success with the SAS. Time will tell, but I can see Super Mario becoming a Kop hero under Rodgers. In the meantime, he’ll get to see his new teammates overturn his old club at the Etihad tonight!
Weekly Market Recap: 25th August 2014
Market Recap
The majority of the major equity indices closed in positive territory last week and demand for government bonds saw yields relatively unchanged, with the main central bankers keeping the party going last week. Germany’s DAX equity index was one of the standout performers, up 2.71% for the week, but still remains down 2.22% YTD. In the US, the S&P 500 finished the week up 1.71%, which included a new closing high on Thursday. In Asia, Japan’s Nikkei 225 Index closed 1.44% higher; the index has now gained 11.47% since May 19th, helping to recoup a large portion of the early year losses. In the government bond markets, the German 10-Year bond yield closed at 0.98% while the Irish 10-Year bond yield fell further to 1.90%!
Draghi Gets His Wish; A Weaker Euro
In the currency markets, the Euro fell to the lowest level in almost a year against the US Dollar. After rising above $1.39 in early May the Euro has been on a steady decline, hitting $1.32 last week. This will be welcomed by Mario Draghi who has previously made efforts to talk down the strength of the Euro. However, the most compelling reason for the Euro weakening has been the economic backdrop in Europe; the Eurozone economy is stagnating and inflation fell further in July to a low of 0.4%. As well, inflation expectations have been falling, increasing the likelihood that Mario Draghi will embark on some form of quantitative easing. Essentially, the market is adjusting to the reality that monetary policy in the US and Europe has been diverging; the Fed has been winding down their latest bond purchase program while in June Draghi announced a package of measures including interest rate cuts, and he is adamant they will remain on a divergent path “for a long period of time”.
US GDP: Impact of Inventory Investment
The initial estimate of Q2 GDP growth showed that the US economy bounced back from the weakness in Q1, explained away by the inclement weather, growing at an annualised rate of 4%. However, while the headline number was received well by the markets the underlying picture may not be as strong with inventory investment accounting for over 40% of GDP growth, which has been the case over the last couple of years. For a quick and simple understanding of the current inventory rebuilding and GDP growth, read this blog posting from Paul Hodges, Chairman of International Echem: 40% of US GDP growth since 2012 due to inventory build. He argues that companies are building inventory ahead of an expected recovery that never comes, forcing them to eventually unload inventory at knockdown prices, resulting in the volatility of quarterly GDP rates and the overall weak recovery.
Week Ahead
On the macro front this week there are a number of important reports for investors to focus on. Key reports from Germany include: IFO Business Climate survey, GSK consumer Confidence, Retail sales, Employment, and Inflation. This should add more colour to concerns that Europe’s largest economy is being hurt by the standoff with Russia and the lack of momentum in the wider Eurozone economy. In the US there is the Markit Flash Services and reports on durable goods, employment, housing, spending and the second estimate of Q2 GDP growth for the US economy.
There is a raft of economic data from Japan on Friday which should provide an update on the progress of Shinzo Abe’s reflation strategy, with reports on retail sales, unemployment, consumer price inflation, housing and industrial production. There is a sense that the ‘Abe effect’ is waning, with calls for faster structural reform and more aggressive monetary policy from the Bank of Japan (BOJ). However, the BOJ are maintaining a more optimistic view for the economy, expecting Japanese exports to pick up, and therefore see no reason to add to their already aggressive stimulus package.
When Bad News is Good News
Friday’s FT headline – “Stocks boosted by weak data” conveyed the general feeling in the markets that last week was another case of the ‘bad news is good news’, i.e. weak economic data will force central banks to keep monetary policy loose longer than expected. In the case of Europe, the current trajectory of the economy and inflation has almost everyone believing that it is only a matter of time, rightly or wrongly, before the ECB joins the unconventional monetary policy club and embarks on some form of quantitative easing. The fervour over the consumption tax increase in Japan and a potential waning of the ‘Abe effect’ has added to calls for the Bank of Japan to become even more aggressive. Meanwhile, “remarkably weak pay growth” in the UK has Mark Carney and the Bank of England backing away from a potential interest rate increase later this year.
Weekly Market Recap: 19th August 2014
Market Recap
Global equities were higher last week despite a raft of weaker than expected economic reports and no material improvement in the geopolitical landscape. The Eurozone economy recorded 0% GDP growth over the quarter while Japan posted the largest quarterly decline since the devastating earthquake and tsunami in 2011, albeit largely expected following the front loading of spending in the first quarter. While equity markets delivered strong performance last week the real story was in the bond market, most notably the German 10-Year government bond yield breaking below 1% for the first time. Peripheral government bond yields fell further with the Irish 10-Year yield closing down 24bps at 2%.
Week Ahead
European equity markets have opened higher following a positive session across all of major equity markets yesterday.
Key macro data for the week ahead includes flash global PMI surveys from the Eurozone and China, a useful leading indicator of what we can expect from these economies in the third quarter. The raft of housing reports throughout the week will provide an update on the US housing market. There is inflation data from Germany, the UK and the US. The Bank of England and the US Federal Reserve will release the minutes from their most recent monetary policy meetings, providing further insight into the views of the committee members.
The annual symposium held in Jackson Hole, Wyoming will begin on Thursday, with central bankers, policymakers and academics meeting away from the demands of their everyday work to discuss this year’s topic “Revaluating Labour Market Dynamics”. The speeches on Friday from the Fed’s Janet Yellen and the ECB’s Mario Draghi will be in focus. In the US, one could ask the question whether the current unemployment rate actually reflects the true unemployment rate given the nature of their benefits system and the drop in the labour participation rate. While in Europe, persistently high unemployment could actually be because of structural unemployment, which may not come down as fast when the economic recovery strengthens. Then there is the Bank of England who are puzzled by the fact that wage growth has been weak even as unemployment has come down much faster than expected. So there is plenty of dinner conversation!
