Global equity markets moved higher last week while government bond yields rose as investors have put the plethora of risks to one side, preferring to take a glass half full view of the world. The sense of panic that pervaded markets in the early part of the year has completely dissipated. The much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, is now back near record lows, down -27.40% YTD.
In Europe, the FTSE Eurofirst 300 Index rose +1.60%. The German DAX index was one of the standout performers, up +3.20%, as investors appear to have put the early year wobble behind them.
In the US, the S&P 500 index was up +0.52%. The index is back in positive territory for the year, up +2.33%. Against a backdrop of falling corporate earnings, valuations are moving higher which is not sustainable.
In Asia, Japan’s Nikkei 225 index surged +4.30%, on the back of a weaker Yen following speculation of further easing measures from the Bank of Japan. Mainland Chinese shares moved sharply lower as hard landing fears are back in focus amidst rising debt levels; the Shanghai Composite Index finished the week down -3.86%.
As markets moved to risk-on mode government bonds fell. With yields moving inversely to prices, the German 10-year bond yield rose 10bps to 0.23%. Japanese government bonds bucked the trend, with Japan’s 10-year government bond yield moving down 4bps to -0.12%.
After 15 years of exile Argentina returned to international bond markets with a bang last week; their bond auction was four times oversubscribed. The country sold $2.75 billion worth of 3-year notes at 6.25 percent, $4.5 billion of 5-year bills at 6.87 percent, $6.5 billion of 10-year bonds at 7.5 percent and $2.75 billion of 30-year bonds at 7.62 percent.
European equities are in the red this morning after the major Asian equity indices moved lower overnight. The German IFO Business Climate Index for April, released this morning, missed expectations but the report concluded “the moderate upturn in the German economy continues”.
Key macro data this week includes the initial estimate of first quarter GDP from the US, the Eurozone and the UK. Disappointing GDP data would stoke fears of a global recession. There is a raft of data from Japan on Thursday, while the preliminary reading for consumer price inflation in France and Germany in April will be watched closely.
On the central bank front, the monetary policy meetings at the Bank of Japan and the US Federal Reserve will be keenly watched. No change in policy is expected from the Fed but investors will be looking for any hints on just how ‘gradual’ rate hikes will be. Speculation has been mounting that the Bank of Japan will pursue more aggressive easing and such an announcement on Thursday would have markets salivating with another end of week rally.
However, it is worth bearing in mind that the inability of the world’s major central banks to normalise monetary policy is a reflection of weak underlying fundamentals. The Bank of Japan will announce more aggressive measures at some point this year, but to what end, as it remains stuck in a two decade long deflationary spiral despite round after round of quantitative easing. Seven years on since the market lows of the last crisis, it is becoming evident that Western Central Banks are struggling to avoid a similar fate.