Macro weekly :: turbulent markets :: 1 may 2015

Page 1

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


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