Week End Blog – Record Highs & Record Lows

This week we got to see more amazing stuff in the European bond markets. The ECB started its massive QE program on Monday, and that didn’t stay unnoticed. Several research items popped up showing that, given the constraints the ECB has imposed on the bond buying program, getting to the desirable amount of EUR 60 billion a month requires a serious effort. It also means that, when the ECB’s monthly buying spree is taken out of the equation, the total stock of bonds left for other investors will decrease.


The possible scarcity (a term also explicitly used in the ECB press release concerning the QE program) of eligible bonds led to another massive downward move in bond yields, with many European countries hitting new lows.


The move in the German 30-year bond yield was perhaps most fascinating. In a matter of days the 30-year yield came down almost 40 basis points to below 0.70%. I don’t think Draghi anticipated such yield levels at all, let alone the speed at which these levels were hit. And it’s still a long time to September 2016.


Bonds yields were not the only thing that hit new lows this week. The euro fell of the cliff against the US dollar and briefly traded below the 1.05 threshold. This is the lowest level since 2002! Some nice extrapolation tweets floated around, suggesting that at this pace the euro could hit zero before summer. That said; looking at interest rate differentials between the US and the Eurozone, the euro might have devalued a little bit too much for now.


Another graph that suggests the same is the one below, which compares the current pace of euro depreciation and the depreciation of the yen in the run up to the BoJ announcement on QE.


Meanwhile, things don’t look all that pretty in the US. Especially the retail sales have been under pressure in recent months. The cold weather definitely has something to do with that, but the underlying trend is weakening as well. The Atlanta Fed now expects US GDP growth to come in at 0.6% for Q1. Yes, that is on an annualized basis.


The massive move in the trade-weighted US dollar is also starting hit companies. EPS growth and dollar strength do not get along very well.


So, could the strong dollar be reason for the Fed not to raise rates? At this pace Yellen could use to the dollar as an argument to take it easy. But, far more important is the development of wages. Wage growth is still muted. On the other hand job creation remains remarkable strong. This should, under normal circumstance ultimately lead to higher wages.


There was a new high this week as well. After the NASDAQ last week, the Nikkei was next. The index surpassed 19000, the highest level since April 2000. The correlation between record low bond yields and record high stock indices is a strong as ever.


This week also marked the sixth birthday of the stock market rally. Six years in which central banks around the world have dominated both equity and bond markets. This week I wrote a blog post on the six years of central bank dominance. You can read it here.


The six-year rally was also very useful input for another very scary graph. Historically,  a six-year equity market rally occurred two times before. One in 1929 and the other in 1999. We all know what happened next. But, before you get too nervous, this chart is also another great example of data mining. If you increase or shorten the rally period with just a few months things don’t look that dangerous anymore.


Thanks for reading the Week End Blog. Enjoy your weekend!

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