Equity markets started the month on a positive note, following on from the strong end to the second half of February. Fund managers who were fearful of a collapse in asset prices a few weeks ago, are now probably fearful of chasing a rally.
Michael Hasenstab CIO for Templeton Investment Managers, in Tuesday’s FT, refers to the deep seated pessimism across financial markets and how this pessimism is driving investors out of “risk assets” and forcing bond yields lower. As an example, in another article the FT refers to the fall in German Bund yields, the 10-year bund currently yields not much more than a few basis points. The article goes onto suggest that some are viewing the possibility of the unthinkable zero rate of interest rate on 10-year government bonds, or even the point where investors effectively pay for the German government to hold their money for 10 years.
He challenges what appears to be the current consensus that inflation is cast to the history books, and that bonds may not be the safe investment they are considered to be. We point out in these articles how being part of a crowded trade can be risky, if everyone decides to head for the door at the same time. History often records what appears the riskiest decision can be the wise one, and the safest the riskiest.
Mr Hasenstab expresses the view that inflation could return quicker than anticipated. His rational, inflation is above target in several Emerging markets, Venezuelan inflation for example currently runs at a whopping 180pct. Core inflation, which strips out the impact of commodity prices, is much more stable than headline. The US is close to full employment and as the largest driving force in the global economy, consumer spending could pick up further.
The beginning of the month is important as we get the release of the Purchasing managers surveys for the previous month. The day started with the Chinese surveys, the index readings came in marginally below expectations. Despite this Asian equity markets finished the day higher, the Shanghai Composite by 1.7%. Perhaps bad economic news is back to being good news for risk assets in the region as it suggests further simulative measures from the Chinese central bank.
The Institute for Supply Management released its estimates for the state of the US manufacturing base. The index reading of 49.5 was above expectations but still is supposed to indicate a contracting manufacturing base. Prices paid by manufacturers rose in the month of February, possibly further adding to Mr Hasenstab’s case for inflation returning.
Completing the major global economy picture, the Markit manufacturing PMI for the euro area came in just ahead of forecasts however unemployment for the region remained above 10pct. Next week we get the awaited Euro area rate decision. It is at this meeting that Mario Draghi is expected to announce further stimulus measures.