Week End Blog – Starring Draghi, Stiglitz and Musk.

The Weekend End Blog is back. September was no fun for financial markets. All asset classes, except cash, realized a negative return. Yes, global equities in euros went up, but this was explained by one factor only, the euro. Stock prices fell. Commodities, already under heavy pressure for some time now, ranked last, again. At least this September, it was the worst month!

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Let’s get rid of all the bad news first. Emerging markets are just not good. After Russia things aren’t looking pretty in Brazil as well, and the social unrest in Hong Kong could easily negatively impact other (emerging) countries as well. The obvious result, lower growth forecasts.

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The ISM Manufacturing index came in two points lower than expected in September. Still at 56.6 the index indicates solid growth going forward, but the unpleasant surprise got the bears all excited.

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This, as a rule this year, was of course reflected in the bond market. In combination with falling inflation expectations the disappointing macro numbers sent the 10-year bond yield in the US and Europe back to their lows of the year. Investors just love government bonds.

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Lower inflation expectations are partly driven by lower energy prices. This, on its own is not necessarily a negative thing (unless you are an oil company). Lower energy prices lead to a rising disposable income. Gasoline prices are falling sharply, although the strong seasonality should be taken into account.

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The ISM data are also part of our fair value bond yield estimate. No surprise here, even after the lower ISM numbers the model still signals that government yields are way too low. The 10-year yield should be over a full 100 bps higher if thing were ‘normal’.

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The ECB meeting was a bit of a non-event this week. Yes, the central bank will buy ABS and covered bonds to prop up its balance sheet. But how big these asset purchases will be is not clear. The ECB intends to increase the balance sheet to where it was in 2012. That would take at least EUR 1 trillion in assets, and the debate is ongoing if this could be done with LTROs, ABS and covered bonds only. I think the ECB has to be very, very aggressive to realize this. This is probably why at least some investors anticipate that a Fed-style QE is still necessary. Anyway, if the ECB would buy EUR 1 trillion over the course of the next two years, ceteris paribus, this is where the balance sheet would ‘end’.

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The US dollar, meanwhile, keeps rallying. Yes, the appreciation of the greenback has been impressive in recent weeks, but the graph below shows that the rise of the dollar has been going on for much longer. Since the middle of 2011 the trade weighted dollar has risen by almost 20%.

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The US dollar strengthened even further when the nonfarm payrolls came in. In September 248K jobs were created and the surprisingly low number of August was revised upward by almost 40K. I reckon the US growth recovery is well under way. A very solid number, indeed.

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A couple of nice charts to round up this Weekend End Blog. First, recently Nobel Prize winner Joseph Stiglitz, stated that the (ongoing) austerity in Europa ‘has been an utter and unmitigated disaster’, in a post titled Europe’s Austerity Zombies. One argument for his telling title was that real, per capita GDP is still below pre-recession in many countries. While this is certainly the case, the comparison I made with the US and UK, showed differences that are less pronounced that I would have expected. The GDP per capita in the UK, for instance, is below that of France.

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Second, in the tweet below Tesla’s Elon Musk offers ECB-president Draghi a much more exciting way to bring a message to the people. Especially, when your story is not that great, like that of Mr. Draghi this week, a little bit of suspense could help a lot 😉

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Thanks for reading!

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