Week End Blog – Tumbling Stocks, Growth Spikes and Yield Reversals

Coincidence or credible warning signal? Whatever it was, the fact is that high yield bonds sold off way before equities got crushed this week. This week is no done yet, but, based on future data, the S&P 500 index is down almost 3% since last Friday. This was also the week that the Dow’s streak of 52 consecutive days without a 1% move, the seventh longest over the last 50 years, has come to an end.

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Still, if we look at the returns for the whole of July, things aren’t that bad. Especially emerging markets and real estate realized pretty strong returns. Oil and gold prices were hit, though.

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The interesting question of course; ‘What is behind the recent sell off?‘ Well, there are quite a few possible suspects. First up is Russia. The US and Europe are imposing more sanctions due to Russia’s lack of cooperation concerning the Ukrainian conflict. Second, there is Banco Espirito Santo, the bank of the Holy Spirit, which lost almost 60% of its value just this week. Default looks imminent and we have no real clue of how this will work out for peripheral banks in general.

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But, perhaps a new risk has appeared on the horizon. The Bureau of Labor Statistics published data this week that showed that wages could be picking up for real. That would put the Fed in an awkward position, since it stuck with its labor slack ‘dogma’ after the FOMC meeting.

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That the wage number could have something to do with the stock market dive is emphasized by the fact that, over the last two days, when equity prices fell sharply, the bond yield went up. This is definitely different from what we have seen before.

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The non-farm payroll data announcement added to suspicions that improving labor market conditions could affect investor sentiment. Immediately after the payroll report, which came in below expectations, bond yields went down and stock markets recovered a bit.

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That said; there is good reason that the big beat on US GDP growth for the second quarter (+4% annualized) also drove yields a higher.

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Much less in the spotlight, but equally important, were the GDP numbers coming from Europe. First take is that, after Q2 numbers from Spain and the UK, the recovery, albeit a muted one, is intact.

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Worrisome the least, remains the CPI development. The Euro zone CPI flash estimate for July showed inflation has set a new low, at 0.4%. Yes, just 0.4%.

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With inflation so close to zero, comparisons with Japan are bound to emerge. This chart floated on Twitter in the last couple of days. A little bit too much resemblance for comfort, perhaps?

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The Spanish bond yield already touched a 200-year low this week. Talking about going Japanese…

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One chart on Japan, but it will tell you enough about how things are going. Macro data has been appalling lately, which is reflected in the Citi macro surprise index. Falling off a cliff, seems like an appropriate description.

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To round up this Week End Blog I would like to refer to a blog on Bitcoin I posted this week. After a 40-fold surge in value since the beginning of 2013 I wanted to find out how big Bitcoin really is. The first blog on this topic, in what is meant to be a series, focuses on Bitcoin as a currency. Interested? Read more here.

Until next week.

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