What's new pussy cat

Equity and bond markets continue to climb, each almost driven by the other. There is little one can say at present until we see an event that changes sentiment. One possibility is the Fed turn a tad more hawkish if the trade deal between China and the US looks more likely. That would undermine both asset classes. That seems unlikely whilst inflation and manufacturing data remains weak. Mark Carney added the Bank of England’s name to those who are likely to cut interest rates, having spent a large part of the past 6 months preparing the UK for a potential rise. Markets are now forecasting a more than even chance of a cut by the year end.

 The global economy has now become reliant on zero or near zero interest rates. Governments have been financing themselves on ultra-low interest rates. Investors buying US homes is at a record high, another indication of taking advantage of low rates of interest. Share buy backs may have slowed but remain close to all time highs as corporates continue to replace expensive equity with cheap debt. In turn flattering their reported earnings per share. The low volatility environment has seen the Vix index and the S&P 500 have once again reached extremes.

Other signs of investors adding risk chasing returns is the performance of high yield compared to investment grade. By any measure global bond markets look over loved. If investors had fallen for equities in the same way that fund flows suggest investors covert bonds. There would be many a strategist issuing warnings that sentiment had gone beyond greed and somewhere into fever pitch.

It was announced this week that Christian Lagarde is set to be the new chairperson of the ECB. Her previous role has been chair of The IMF. A body not generally known for their rosy outlook on life.     She is considered a dove and it is assumed that she will want to take a similar monetary stance to that of Mr Draghi. Jens Weidmann Chairman of the Bundesbank was widely tipped for the roll, his nomination may not have been so well received by equity or bond investors.

The current scenario we live in is the one we have been operating in for some time. Cheap money supporting a global economy encouraging risk taking.

Posted on July 4, 2019 .