Week End Blog – Heading for the Greek Abyss?

· by · in FINANCIAL MARKETS, MACRO. ·

It has been a couple of weeks but Greece regained its top spot in the financial headlines as debt talks did not yield any tangible result. If anything, things are getting worse as comments from both sides got ‘intense’ again. Meanwhile, yields on Greek government bonds rose rapidly and the probability of a Greek default rose to almost 90% at some point. Yes, that is 90%.

The nearing Greek debt abyss was also reflected in other peripheral bond yields. Contagion is certainly not behind us as the spread data in the graph below shows. Especially spreads Portuguese bonds widened substantially.

Meanwhile yields on German bonds set a record low day after day. The yield on the 10-year bond fell to an incredible low of 0.049% on Friday. The question is no longer if but when the 10-year yield becomes negative.

And so the percentage of total Eurozone debt outstanding with a negative yield continues to grow. Still, Mr. Draghi does not see any price distortions yet. Negative is the new norm!

Several ECB members mentioned this week that inflation expectations have improved somewhat, but aren’t at desirable levels yet. In the UK CPI came in at 0.0%.

Although equities came under pressure towards the end of the week, the overall trend has been very positive so far. This week the total market cap of global equities surpassed the USD 70 trillion(!) for the first time.

China’s equity market is in ‘skyrocketing-mode.’ During the last 25 trading days the Shanghai composite index rose more than 2% on seven occasions. Nearly one in every three days. Since June 2014 the index has risen by a massive +110%. Earnings, however, have not gone up at all. Since June 2014 earnings are… down 2.5%.

In the US, macro data are sluggish at best. March retail sales recovered less than expected, resulting in a year-on-year rise of just 1.3%. That is the lowest in years, and also significantly less than in the Eurozone. The Atlanta Fed expects growth to come in at only 0.1% for Q1.

But better times could be on the horizon. In my other blog this week I looked at the relative performance of Eurozone stocks compared to US stocks once the difference in the Citi surprise indices between the two regions peaked. It turns out that in recent years a peak of more than 100 points between the Eurozone surprise index and the US surprise index was followed by an underperformance of Eurozone stocks up to at least 90 days after the peak. To read more click here.

Enjoy your weekend!

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