Week End Blog – ECB & OPEC Non-events

· by · in FINANCIAL MARKETS, MACRO. ·

I don’t know what to make of this week in financial markets. I guess some major events were on the agenda, but nothing to get really excited about. As expected the ECB announced no new measures. Draghi shed some light on corporate bond buying and dismissed helicopter money for now. With the absence of Ms. Josephine Witt,  who ‘glitter-bombed’ Draghi at the press conference last year, things were pretty boring. Let me, therefore, remind you that the whole QE thing hasn’t brought much joy to European markets. They are down 10% since QE was launched.

Also, bond yields have started to move up. It’s perhaps a little early, but so far the resemblance with last year is striking.

There’s no shortage of bond madness however. Just take a look at the 40-year Japanese and the 50-year Swiss government bond yield, and you’ll know things are just weird.

Let me show this in another way. Since the start of this year, the Japanese 40-year government bond realized a return of 38%. I know, that number is just ridiculous. But things get even more dramatic when that return is compared to Japanese stocks, which realized heavy losses since the start of this year. I can’t imagine  anyone predicting you could earn 50% in less than four months going long bonds and short equities.

About that other ‘non-event.’ As should have been expected, the OPEC meeting in Doha led to absolutely nothing. Oil producing countries are just too preoccupied with their own budgets and keep on pumping. Anyway, after an initial drop of up to 7%, oil marched onto higher grounds.

In case of Saudi Arabia and Iran, they are also too preoccupied with each other. No matter the cost, as long as the other does not gain market share everything is fine.

Meanwhile, the collapse in commodity prices is taking its toll. 46 defaults already this year, mostly within the energy sector, has pushed the default rate to a 7-year high.

But, since investors totally lost track of reality in the first two months of the year, 46 defaults is actually pretty decent. At one point, around the middle of February, high yield investors expected more than 50% of all energy companies to go bust. This is not going to happen.

In China, things are looking brighter. Well, at least in the short-term. Monetary and fiscal easing is showing up in macro data. The economic surprise index is at the highest level in over a year and money supply is growing at a very rapid pace. This week, I will not mention the part that credit plays in the China growth story. Ok?

While we keep guessing when China will overtake the U.S. as the world’s largest economy, you might want to take notice of the fact that China has been the country with the largest share of global GDP for centuries.

Despite recession fears, and low growth numbers, a U.S. recession could be way out. The 4-week rolling average of initial jobless claims, historically a pretty decent recession forecaster, will probably hit a new low next week. On average it took 12 months after a low in initial jobless claims before growth turned negative. Let’s await that low first.

Finally, some very cool hyperinflation data. Venezuela would enter the top 10 of hyperinflation cases as inflation could rise to 1000% soon. But that’s nothing, absolutely nothing, compared to the hyperinflation that Hungary and Zimbabwe experienced.

Hoping this Week End Blog wasn’t too much of a non-event for you, enjoy your weekend!

 

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