A dovish Mario took equity markets by surprise, as did the recovery in the oil price on Tuesday. Equity and bond investors expected another reiteration of Mario Draghi’s stance expressed at the monthly rate-setting meetings that the recovery in Europe was too early in the tooth to think about raising interest rates. Instead, speaking at the ECB Central Bank forum he expressed the opinion that the recovery in Europe is “strengthening and broadening”. “Deflationary pressures have now been replaced by reflationary ones”. These comments sent the euro higher and the equity markets in Europe lower. European bond yields also rose, however, yields on both German and French 10-year bonds remain close to historic lows.
The International Monetary Fund was the latest economic body to give Mr Trump the thumbs down as they reduced their forecasts for economic growth forecasts for the US to 2.1% for this year and the next. The IMF believes that Mr Trump's target of 3% economic growth is difficult to achieve with an ageing population and low productivity growth. Another sign that the US economy could be slowing was other weak Durable Goods orders number for May released on Monday.
US Treasury yields have been falling at the longer end and rising at the shorter end of the curve. This likewise should indicate the bond market has concerns that economic growth is weakening in the US. US nominal GDP growth year on year has historically tracked 10-year government bond yields. With current ten year yields around 2.2%, one could argue the bond market and the IMF are in tune. However, the era we live in today, with central banks continually meddling in the capital markets is its hard to truly value any asset, all one can do is use comparisons. If ten-year German bunds currently yield approximately 0.35%, US Treasury yields, in theory, must be capped on a risk-adjusted basis and 2.2% they still look a better bet.
Frank Investments were fortunate to attend a Capital Economics Emerging Markets Forum on Tuesday. Capital Economics is a macro research consultancy created by well-known journalist, author economic commentator and Eurosceptic Roger Bootle. Emerging economies now account for more than 50% of the global economic growth, the good news is that Capital Economics believe that emerging economies will grow by circa 4% in a coming couple of years, even accounting for a China slowdown.
One aside Argentina has managed to a bond with a maturity 100 years from now, the issue was 3 times oversubscribed. The interest rate offered is almost 8%, which if paid an investor would get his money back in 12 years. Argentina has a history of defaulting on its debt, the most recently in