"Today is the only day, yesterday is gone" John Woodham

The S&P 500 hit new highs as the FTSE 100 finally closed above 7500, and held on to those gains despite a weak GDP revision for the first quarter. The correlation that had been drawn between the performance of the FTSE 100 and the strength of sterling, recently the FTSE 100 has remained as resilient as the pound. Deutsche Bank analysts released a report on Wednesday expressing the view that they believe the FTSE 100 is now the cheapest index in Europe. Despite fears of bubbles and valuations, along with suggestions that we are reaching euphoria territory, equity prices continue to grind higher around the globe.

The downgrade of Chinese debt by rating agency Moody’s did not cause a flicker in the global markets, or in Chinese bond markets. The Chinese 5-year credit default swap still trades close to its 2 1/2 year low, suggesting that there are no serious fears on a Chinese debt default in the next five years. Chinese debt is now running at 250% of GDP, however only a very small percentage of this is owned by foreign investors. The bulk of it is owned by Chinese citizens. The level of debt within the Chinese economy is often quoted as another reason of concern for investors. It is possibly worth keeping an eye on China’s interbank rate, the rate banks charge each other to lend to one another. The rate has been steadily rising over the past year and currently stands just below 5%.

The Federal Reserve released the minutes of the May meeting on Wednesday evening, and the consensus view amongst the financial press is that June 13th/14th is the date the Fed will look to raise rates again. The release of the minutes barely ruffled the feathers of the US bond market, yields on 10 year US treasuries at 2.25%, remain well below the peak they reached a few months ago. The data coming from the US economy ahead of that meeting will be monitored for signs strength or weakness to the US economy. Employment remains robust which is probably the Fed’s main driver, however on Thursday the announcement that the US goods deficient had widened and inventories shrinking could suggest that economic growth assumptions for the second quarter may again be under pressure.

Tensions may build in Europe again as ECB president Mario Draghi reiterated that he believes there is no reason to deviate from the guidance he has provided. Some estimates are for the German economy to be growing at 5% this year as the future inflation guide for Germany may be at a 35-year high. At the same time the ECB continue to pump liquidity into the region to assist countries such as Greece and Italy. The Greek debt crisis continues to rumble on as an agreement for the next tranche has yet to be agreed. We have often expressed in this blog that the only possible rational for buying German 10 year bunds trading at a few basis points is if Germany was to reintroduce the Deutsche mark.

Posted on May 25, 2017 .