Equity markets continue to drift higher ahead of Thursday’s ECB meeting; the S&P 500 hitting a new high for the seventh time this year. Studying the trading platforms to get a sense of where trader’s sentiment lies, it is clear many traders are still playing the catch-up trade of last year between the FTSE 100 and the S&P 500. Attempting to profit from the mean reversion between the FTSE 100 and the S&P 500 has been a common theme amongst traders for some time and has been a long and painful road. To quote the well worn phrase "markets can stay irrational longer than traders can stay solvent".
While investors wait to see what happens at Thursday’s ECB rate decision, Greek benchmark 10-year government bond yields fell to a four-year low of 6.19%. The latest boost to Greek bonds was given as eurozone finance ministers finally signed off on the €8.3bn bailout tranche. The money had been held up since September last year, as the finance ministers insisted Greece implement more economic reforms. What extra economic reforms the Greek government have put in place, if any, I am uncertain of, but once again I would imagine it was a game of chicken- waiting for the first group to blink. Eventually the troika blinked. As one can see from the chart below, Greek 10-year bond yields are now back close to the level they were before 2008. That is either great credit to the ECB and the IMF as to how they have handled the situation, or blind faith by investors prepared to take more risk looking for income.
We remain convinced that the ECB will not announce a QE initiative at 12:45 tomorrow, despite the latest inflation data. The rationale is simple, the ECB has only moved when the spread between the yields of German and peripheral bonds has widened to unacceptable levels. As we have seen recently, spreads are currently as tight as they have been for several years. One interesting observation in the Wall Street Journal today, is that the ECB might want to consider before too long: German 10-year bond yields are broadly where Japanese yields were when the country slid into deflation in the late 1990s.