Market Watch

 Week ending Friday 5th August 2016 The UK cut this week, Australia last week. The ECB and Japan are in negative rates. Yet bond markets are saying there is little or no inflation or nominal growth on the horizon. In fact, the opposite, hence the cutting of rates to stimulate some growth – even if it often appears futile. The big daddy of monetary regimes, the US, is still set on a tightening course, can it hold out? Probably, not. But there are obstacles. The US economic growth is weakening but not disastrously so One obstacle to US rate cuts… Read More

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There was quite a lot of monetary news during the week that shifted currencies and bond markets around. The FOMC kept rates unchanged as expected but attempted to warn about the risks of higher rates later this year by claiming that the economy looked much stronger than markets think is the case. Although markets immediately reacted by reflected a tightening of monetary policy the disagreement with the FOMC on its economic assessment and the impact of a tightening led to currency weakness and bond yields falling. On the day of the FOMC announcement three random, unconnected, pieces of economic data… Read More

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A very quiet week in the markets partly the start of the major vacation season, partly due to waiting to see how the real economy reacts to Brexit in the UK and Euro Area, but probably mostly due to the fact that FOMC members were in purdah ahead of their meeting next week. Silence is sometimes golden. Bonds were very quiet indeed, barely moving anywhere along the curve. The 10-2 spread has “risen” back to around 85bps – still well down on historical levels and should be a massive red flag for the FOMC. The USD did drift up slightly… Read More

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The week was calmer than many with the USD and S&P500 largely flat. Bond yields recovered from the risk aversion of previous weeks, in particular the 10yr US Treasuries that rose nearly 20bps from 1.37% to 1.56%. Two year Treasury yields rose a lot less, just 7bps to 0.68%, thus steepening the yield curve and slightly lessening the likelihood of a recession seen when the 10-2 spread dropped into the 70s. It still indicates very slow growth ahead. Base Money helps out in the short term even if trend is down Interestingly, US Base Money also recovered from its drop… Read More

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Brexit turmoil generally subsided during the week, although inexplicably “caused” a collapse in Italian bank shares. Obviously, Italian banks are weak and did not need Brexit to cause a collapse. A combination of some poor banking structures and practices very much exacerbated by low interest rates and weak nominal growth is all that is needed to crash a banking sector – coupled with a tough attitude from the regulators and central bank. Base money and the 10-2 spread indicate economic slowdown US Base Money did not rebound from its rather mysterious drop of the previous two weeks. The new, lower,… Read More

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Brexit dominated the previous week’s market moves and also this week. Many pages were written trying to interpret the market moves following the vote, most of which had to be torn up as the markets continued to move rapidly, equities to recover, currencies to stabilise and bond markets to expect yet a longer period of low growth. Some Market Monetarists overplay their hand In particular, some of our Market Monetarist friends were on the front foot claiming Brexit as a major global monetary shock, but couldn’t decide whether it was a supply or a demand shock or both. Was it less… Read More

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Well that was quite some end to the week. Very lively markets but the end result not so telling The S&P500 rose 2% over the week to Thursday, partly buoyed by weekend reports that the UK would vote Remain, partly by relief that the Fed was not going to be hiking rates soon, partly other stuff that we can’t know, possibly by the upturn in some June survey data (see below). The index then fell 4% on Friday after UK voted Leave. A net negative 2% change over the week and not a lot different to a usual week. Two… Read More

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Our MAST Index has continued to fall down to below 55 from the mid-May peak of nearly 65. The dissipation of the April optimism after modest recoveries in surveys and data has not been sustained. We had already seen a run of poor May surveys that turned concrete with the poor May payrolls data, followed up by poor Industrial Production figures for May last week. FOMC reacts quicker to strong data than weak data – tightening bias still intact Back in early May we had feared that the Fed would see the modest April pick up as a reason to… Read More

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Equities always seem to get it last Equities had to wait until the end of the week before they started to properly react to the facts of the US economic slowdown. There was no specific trigger for them to fall but bond yields had been giving a clear steer since the week before. Technicals can often drive markets, things like “crowded shorts”. This is where too many people are betting on a bad outcome that doesn’t occur, leading to short covering, that actually drives markets in the opposite direction to the democratic consensus of market participants. The problem is that… Read More

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“Oh, the grand old chair of the Fed, she had 10,000 men, she marched them up to the top of the hill and she marched them down again” Late Friday May 26th Yellen reaffirmed the strong bias of the Fed to raising rates sooner rather than later. A string of speeches from both regional Fed Governors, the Minutes of the April FOMC meeting and a speech by FOMC Vice-Chair Dudley seemed like a concerted efffort to scare the markets, topped off by Yellen herself.. This wave of Fed tightening warnings came despite a run of poor data that had convinced… Read More

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