Gratch 22

The calm at the start of the week was replaced on Wednesday and Thursday by a sharp selloff in equities prompted by a weaker than expected durable goods order number from America, and some increased tensions in the Middle East. This fall was despite the announcement of another mega merger, this time between Kraft and Heinz. It did start to feel that investor complacency had crept into the market post last week's central bank comments, as investors began to sense that the central bank put option was still well and truly in place. The inflows into European equities that have been reported over the past few weeks would add credibility to this view.

The term "central bank put" comes from the belief that investors risk positions are effectively underwritten by the actions of the central banks. Should the data weaken central banks will return with more stimulus, should the data improve economies will strengthen and so will corporate profits. These bouts of nervousness, assuming they don't turn into routs, are probably helpful for the long-term health of equities as they can act as a reminder to those who get greedy.

Greece remains at the forefront of investors focus in Europe; Greek 10 year bond yields did rise as high as 12% in the week, but fell back after some soothing comments post the meetings with Angela Merkel. The latest addition to the dictionary for what could happen regarding Greece is Graccident, this is apparently the term coined to describe the possibility that Greece could leave the euro by accident. Greece remains insolvent and illiquid and despite a modest improvement in the economy continues to have a burden of debt that can only be reduced realistically by write-off's, something that is unacceptable to the rest of Europe, Gratch 22 perhaps.

The US dollar has lost about 4% against its peers in the past week post last week's Fed meeting, equities in the US are now also lower than they were on that day, as are bond yields. In the past a falling dollar has been seen as good news for risk assets, as it reflected a looser monetary policy from the Federal Reserve. This trend was bucked last year as the US dollar rose along with equities. A strong currency may be seen to impact exports but on the other hand it is a sign of a strong economy, maybe investors will now focus more on the dollar as a barometer of the US economy and less as a reflection on the Fed policy, for a change stabilisation in stock prices may well coincide with a stabilisation in the dollar. 

Posted on March 27, 2015 .