Equity markets stay benign, but there is plenty for investors in both bond and equity markets to digest. On Thursday, the ECB announced they were leaving interest rates where they are, however the accompanying statement from the ECB chairman Mario Draghi, and possibly with one eye on any German finance ministers who may be in ear shot, suggested that the ECB are considering easing off the monetary gas pedal ever so slightly. Or at least have little intension of putting the foot down any further.
One should put this into context, the yield on the German bund rose to a staggering 0.4% post the press meeting, and the euro rallied modestly against the dollar. Whilst the world debates why the yield on the US treasury apparently fails to reflect the improving economic outlook, it probably should look no further than the yield on the German 10-year bund for the explanation. If an investor can pick up a 2% improvement in yield owning a dollar asset, this must look vastly more attractive than owning the equivalent euro asset.
We attended a global investor conference on Thursday, featuring experts from diverse backgrounds. One chair of a panel made up of four macro economists, stated he was trying to get consensus amongst the panellists, which he of course failed to do. As an example, one expert panellist put forward a very rational explanation for why there was a global short in the US dollar, and another why he believed there was likely to be an influx of trillions of dollars back into the US which would weaken the currency.
China, is becoming more of the swing factor in the global economy. Two periods of monetary stimulus in that economy, 2008 and last year, have boosted global growth and stock markets. Fears that the Federal Reserve tighten monetary policy too quickly, pouring cold water on the US economy as it starts to recover, could well not have as meaningful an effect as if China was to follow suit. Particularly if growth in that region was slowing.
Another speaker, and advisor to Donald Trump, went through the reasons why the global economy bears a great resemblance to the 1930’s, in his view. He was vague as to whether he believes that the conclusion is the same as the end of the 1930’s.
Is inflation on the rise again, or are we in a structurally deflationary world where efficiency gains ensure prices do not rise? There were those “experts” who believed inflation was on the rise and those who were not so sure.
The conclusion to the day, the more you analyse the more confused you can become. One conclusion we came away with, where the bond market leads, the equity market will probably follow.