Market Commentary – Wednesday, 10th July
It’s been a busy period for central bank interventionist news and economic releases, with the former becoming even more aggressive as the latter continuously disappoints. Despite a surprisingly positive US Jobs number, the majority of the data reports have been worrying.
How bad was the data?
Starting with the ever-important US Corporate confidence:
(Source: WSJ, Daily Shot)
This is now at 2008 levels. The ADP employment report echoes a similar story:
(Source: Real Investment Advice)
One final US Data point; the NY Fed Recession probability indicator is soaring.
(Source: Win Smart)
Again, another historic warning. In Europe, things are looking recessionary if we take a look at the German manufacturing orders year-on-year. These are German manufacturing orders year-on-year:
Germany’s issues were further compounded by the profit warning from chemical giant BASF. Furthermore, the highly anticipated Deutsche Bank turnaround plan failed to please investors.
Meanwhile in Asia, the Chinese Caixin Manufacturing index went into contractionary territory while in Taiwan the PMI (Purchasing Manager Index) hit 45.5 – an all-time low.
This is just a small sample of a slew of bad data in the last weeks.
How did markets react?
As expected in the current climate, equity markets rallied hard, and in the US, reached all-time highs. As previously covered, bad news equals higher markets and this remains the current mantra. Global slowdowns give the excuse for incremental policy action by central banks.
The consequences of this are rather staggering, however. There are plenty of examples, but these are the choice data points:
Greek 10-year bond yields are almost below the 10-year US Treasury
(Source: Dani Burger)
The German 10 year dropped to -0.40% for the first time ever while the entire Danish bond curve is now below 0%. Indeed, $20 Trillion of the $55 Trillion Global Sovereign Bonds yield 0% or less.
Truly, these are unprecedented times. The market is saying that the credit-worthiness of the United States is equal to Greece. Of course, the particular surge was helped in part by the appointment of a new ECB President who is not averse to negative rates. The narrative now is that current president Mario Draghi has locked his successor into a new round of quantitative easing and/or more negative rates.
Furthermore, the US President also demanded the US manipulate the US Dollar because other counties were doing it. The world is on the edge of a total trade and currency war. And all the certainties and rules of the last seventy years are being thrown out the window.
What are the latest consequences?
Asset allocators and investors are being forced into riskier and riskier assets. As mentioned previously, there are more and more stories that show that those can sell, are selling – case and point being Virgin Galactic announcing plans for public listing. And those that are being pushed into riskier assets are not always aware of what their real risk is, with US customs seizing a ship owned by JPMorgan after authorities found $1 billion worth of drugs on it.
On a far more serious note, negative junk bonds are now a reality in Europe. There are now 14 euro-dominated junk bonds that have a negative yield. Junk bonds usually have far higher yields to compensate for the higher probability of default:
This, again, is unprecedented. The forced buying of so many assets by the ECB and the perception that this will continue, perhaps into equities, or properties, ETFs or cryptocurrencies means that very little in the market is priced in the way it once was. Things appear far safer than they really are.
Gold retreated back down through $1,400 after the strong US jobs number but recovered well. This partly due to a number of statistical caveats cited as anomalies in the jobs number. However, the main reason was Trump’s “manipulate the dollar” comments as well as Christine Lagarde’s appointment to the ECB. In addition, the make-up of the new heads of the EU is staunchly pro-integrationist and certainly for “more Europe”. This direction may help reassure markets that the EU will do absolutely everything to hold the entire edifice together. Even if this means policies that even now seem impossible to enact. Fiscal stimulus, MMT, joint EuroBonds, centralised taxation at a supranational level. And all done with the minimum of popular consent or approval – since “more Europe” is very much rotting in many opinion polls throughout the EU.
The past two weeks started a new phase in interventionism by governments and central banks. Policy makers are becoming bolder while markets seem happy only when there is the promise of more stimulus. Ultimately, such undermining of purchasing power and the sanctity of sovereign currencies only means that hard, real assets should only increase in value.
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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.