The first quarter of 2015 ended on a rather downbeat note, despite this for the 3rd quarter in row stock prices rose as did the US dollar, bond and commodities prices fell. In a recent report Merrill Lynch, slightly unnervingly, pointed out the last time bonds and commodities fell and the dollar rose for three consecutive quarters was during the Lehman crisis. What has felt like a volatile start to the year has not prevented the Vix index finishing the quarter lower than it was at the start of the year. Merrill also pointed out there have been a staggering 25 rate cuts so far this year around the globe, taking the total above 500 since Lehman, the era of loose money from central banks continues.
The divergence in bond and equity yields continues to cause much debate amongst capital market professionals. For example in Germany one has seen economic growth picking up, sentiment improving, and unemployment falling and yet none of this has moved the needle in the bond market. German 5 year bund yields remain in negative territory, and 10-year bund year yields remain barely above zero. Bund yields appear to refuse to recognise this apparent upturn in economic sentiment. One view is that the low yields are a function of supply and demand, with Germany issuance of debt in the coming year almost negligible and the ECB committed to buying bunds every month, insurance companies hoarding bonds there is no supply. German equities continue to yield circa 3%, both can't surely be right but only time will tell which one is wrong.
From the start of the year and almost coinciding with the introduction of the ECB's quantitative easing program, economic surprises in the euro area have been rising and conversely been disappointing in the US. The weather in the US has taken the blame for the sluggish start to the year in the US, money flows have followed the change in the economic surprises as investors have sold US equities and bought European ones. Thursdays ADP employment data reported weaker than anticipated additions to the pay roll adding to the recent trend of disappointing economic data from the US. Analysts will probably have started downgrading expectations for the coming months and conversely in Europe expectations will probably have risen, this could lead in the second quarter to a reversal of trends for both regions.
The US dollar has risen 9% year to date, it may be that as analysts downgrade economic assumptions they will also push back rate rise expectations again. This may lead to some weakness in the dollars gain in the coming quarter.