Complacency is dangerous in any market

Asset price volatility continues this week as the oil price has now risen almost 20% from the lows, although nothing much on the face of it appeared to change in the world. Indeed the announcement that China had lowered its reserve ratio on Wednesday actually led to some profit taking in the sector. The oil price will probably remain volatile and this move up may not be down to a change in fundamentals but some old fashioned short covering. Media reports suggested the move by the Bank of China to lower its reserve ratio may be linked to the upcoming Chinese new year; the period is one of increased spending by the Chinese people. Whether this is true or not, after the move by the Bank of Australia earlier on in the week, it continues to reinforce the fact that central banks continue to add liquidity to a global economy suddenly benefitting from far cheaper oil. Speculation is increasing that we may see another cut from the Bank of China in interest rates in the coming weeks.

We pointed out on Wednesday that we saw a change in investment focus as the more cyclical sectors were outperforming the expensive bond proxies. This move appears to be continuing into the second half of the week. It will be interesting to see how investor positioning has changed when the results of the next fund manager surveys become available, and if this is reflected in fund manager sector weightings. Should sentiment continue to change towards the resource sector it could well only be a matter of time before the FTSE 100 finally breaks the 7000 barrier. 

The situation with regards to Greece seems to be rumbling on as the ECB declared it would no longer accept its bonds as collateral. As protestors once again are hitting the streets of Athens, equity markets are taking the latest developments in their stride. There may well come a time when markets take the view that the situation in Greece could not carry on as was and the election of the Syriza party, if nothing else, will bring matters to a head and a longer term solution regarding Greece's unmanageable debt burden will be found.

Recent economic data has been a bit shaky, particularly where the US is concerned, this cocktail of low energy prices and low interest rates at any other time in history would have led to a boost to the global economy. One gets the sense that bond investors are complacent in the face of this highly simulative economic combination. Bond yields remain at historic lows for now, as we see with the equity markets when sentiment changes it changes quickly.

Posted on February 6, 2015 .