Macro Weekly Turbulent markets, indicating what?
Group Economics
Han de Jong +31 20 628 4201
1 May 2015 Financial market have been relatively volatile in recent days. Core eurozone bond yields have risen sharply and equities, European ones in particular, have lost ground. Investors need to think what has caused this and what the implications are. I fail to see a clear connection with recent or future developments in the real economy. Yes, the US economy has made a very slow start to the year, but is expected to gain momentum in the period ahead. The Fed did not give clear hints about what it might do next. Eurozone data continues to confirm that the economy is recovering and the sidelining of Greece's finance minister appears to be giving the negotiations between the country and its partners a boost.
The message
clearer is not obvious. Some commentators are saying that
I am a great believer in the collective intellect of financial
weak US growth has driven equities down. However, that
markets, though I sometimes, arrogantly, think that the three of
seems to be at odds with the fact that European equities are
us (I, me and myself) know better than all the market
losing more ground than US equities. I suspect that there is a
participants together. Recent market action is a bit of a puzzle:
big element of 'taking a breather' in all of this. The Euro Stoxx
despite continued ECB bond buying and increasing scarcity in
50 index rose more than 21% between the end of last year and
some segments of the eurozone bond market, yields on core
the peak in mid April. Despite recent losses, the market is still
bonds have risen relatively sharply over a short period of time.
up almost 15% for the year. Some profit taking in bonds was
Meanwhile, spreads of Spanish and Italian bonds over
perhaps also overdue as the 10yr Bund yield was heading for
Germany did not widen. Spreads of Greek bonds, on the other
zero yield at an impressive pace.
hand, actually tightened significantly. This has coincided with a strengthening of the euro. Such a combination points to an
Arrogant?
easing of fear for something. Core eurozone bonds have
Perhaps I am arrogant, but I do not believe that market action
benefitted in the past not just from ECB buying, but also from
is signalling economic problems ahead. Yes, the US economy
safe-haven flows as the negotiations between Greece and its
slowed significantly in the early months of the year. It is clear,
partners failed to make substantive progress. The dollar may
however, that weaker growth was at least partly caused by
also have benefitted from the Greek saga and is now losing
temporary factors. A rebound in growth is on the cards, it is
ground.
just a question of how much. Recent US data was broadly supportive of our optimistic view. Private consumption rose a
10yr Bund vs EUR/USD
relatively robust 1.9% in Q1. House prices continue to rise modestly, the Chicago PMI recovered in April to 52.3 from 46.3
0.6
1.25
in March, the nationwide ISM stabilised at 51.5 in April,
0.5
1.20
personal spending rose 0.4% mom in March while initial
0.4
1.15
jobless claims fell to their lowest level since 2000 last week.
0.3
1.10
0.2
1.05
0.1
1.00
0 01-Jan
01-Feb
01-Mar
10Y Bund (%, lhs)
01-Apr
0.95 01-May
EUR/USD (rhs)
The FOMC met this week and released a statement that gave something to everybody. Clearly, the economy was weak early in the year; clearly this was partly due to 'transitory' factors; clearly the exceptionally low interest rates are, or will soon be, unwarranted by domestic economic conditions. The FOMC omitted from its statement a phrase from the previous
Source: Bloomberg
statement that ruled out a rate hike at the following meeting. Does that mean they will raise rates in June? Not necessarily.
Why equities should sell off sharply just when confidence
My reading is that, despite the FOMC's unanimity at the April
about the economic future of Greece seems to be getting
meeting, the committee is extremely divided. This makes