Confidence or complacency

Equities took a tumble on Tuesday, a combination of further Greek fears and concerns on the implications for US earnings from a stronger US dollar. Renewed fears around the Greek situation were caused by speculation that Greece will be unable to meet its next IMF repayment. As they could not make the last one, it seems reasonable to assume they will not make this one. Press reports at the end of Tuesday suggested that the US was looking to put pressure on Germany to find a solution. We have always argued that the euro is not a European problem, but a global one, and the fact the Americans are getting involved highlights that point in our mind.

We also highlighted in Tuesday's blog that there was a raft of data coming out in the US on Tuesday from House sales, manufacturing, consumer confidence and durable goods orders. Overall the data was no worse than analysts forecasted.

A rising US dollar is often considered a sign that investors are looking for safe havens, and this is why it  is often correlated with a fall in US equity prices. In the past 6 months this trend has been bucked, probably as investors have considered the rising dollar more a sign of a strengthening US economy. Currently the data is not suggesting a stronger economy, hence possibly the rally in the dollar is being considered more of a defensive move at this moment in time. Unlike recent weakness in equities that has seen bond prices also fall, yields fell on the 10-year treasury on Tuesday, again a reflection of a more cautious market. The US treasury auctioned 2-year bonds today at a yield of 0.64%. This is a level higher than recent yields and may indicate bond investors have taken Janet Yellen's comments on Friday to suggest September may in fact see the first rate rise.

We pointed out on Monday that the Vix had fallen to the bottom end of its trading range close to 12. We said this indicated that investors were confident for the equity outlook in the short term. That confidence or complacency appeared to be eroded on Tuesday as the Vix rose back above 14. Over the recent months that equity prices have tended to give up gains made during the month towards the end of the month, we shall see if this pattern is continued into the end of May.

Posted on May 26, 2015 .