Notes From Underground: At the End of Q1, Global Equity Markets Are Floating on a Sea of Liquidity

The tale of the first quarter tape is in and evidenced by the large gains of the equity markets, global investors have benefited from the sea of liquidity provided by the CENTRAL BANKS OF THE DEVELOPED WORLD. Global stock markets have been calmed by the massive liquidity injections provided by the BOJ, ECB, FED and BOE.The German DAX closed the quarter up more than 15%. The long dormant NIKKEI was up almost 20% powered, by the new inflation mandate of the BOJ/MOF; and, of course, the S&Ps were up almost 12%, while the tech-ladened NASDAQ climbed more than 20%.

The move out of the safety of the GLOBAL BOND MARKET would have been more pronounced except that the massive SEA OF LIQUIDITY was riding the wave of CENTRAL BANK BOND PURCHASES, or is now conveniently referred to AS QE (QUANTITATIVE EASING). The risk on paradigm was the dominant theme of the first quarter. The markets have been calmed but as this weekend’s headline in the Financial Times proclaimed: CRISIS IS NOT OVER, EU REPORTS WARN.

So as we enter the second quarter, expanded stock rallies will be tougher to find but if EQUITY MARKETS churn sideways in search of a genuine global growth story, that will be no small feat. Last week Chairman Bernanke assured U.S. markets that the employment situation in the U.S. is far too fragile for the FED TO REMOVE ITS EXTENDED PERIOD LANGUAGE.

Europe is of course a highly complex and volatile situation and under the guiding hand of ECB PRESIDENT MARIO DRAGHI is more concerned about growth than inflation and will be looking for various ways to enhance ECB lending programs. April brings the first round of the FRENCH PRESIDENTIAL ELECTION so calm should prevail as Sarkozy will be trying to present himself as the only leader that France has with the ability to calm a crisis. Spain is certainly on financial market radar screens as the next EURO PROBLEM CHILD, but the Spanish situation will just have to wait until the political situation in France is resolved.

The Japanese have learned that an overly strong YEN in a fragile GLOBAL ECONOMY is no virtue, while a rising NIKKEI built on increased liquidity is no vice. The British authorities have certainly applied increased liquidity but its economic impact has been very lackluster. There are worries that the U.K.‘s austerity budget is beginning to weigh on the economy and fresh fears of a new recession are on the rise.

While the FOOTSIE has been the weakest of the EQUITY MARKETS, the BRITISH POUND closed out the quarter over $1.60 for the first time since June 2011. For the quarter, the U.S. DOLLAR and the JAPANESE YEN were the weakest currencies ,reflecting their roles as GLOBAL FUNDING VEHICLES. Europe’s LTRO programs brought calm to the EURO currency and a brief respite, but as AUSTERITY BUDGETS TAKE HOLD THE EURO’S LOW INTEREST RATES AND ECONOMIC WOES WILL BRING RENEWED SELLING PRESSURE. Again, the QUARTER is over so refresh your technicals and be prepared for the volatility that will certainty follow the massive liquidity injections.

***Quick Hitter: It was interesting to hear Mexico’s Central Bank Governor, Agustin Carstens, openly advised that the candidates for Mexico’s July 1 presidential election need to be promoting labor market reforms and more importantly a need to revise the Constitution of 1938 so as to allow for foreign investment into the Mexican energy sector. My longtime readers are well aware that in order for Mexico to thrive and its energy sector be revitalized foreign investment and expertise is needed. Mexico’s current president, Felipe Calderon, had run on a pledge to seek FDI for Pemex but his efforts have failed in Congress for the last six years. The fact that Governor Carstens is voicing an opinion may aid the effort and actually come to some fruition. If Mexico were to reform its energy sector and allow for foreign oil firms to invest, it will be very BULLISH the MEXICAN PESO  just something on the radar screens again.
***Monday night 11:30 p.m. CST, the RBA will announce its interest rate decision. The AUSSIE DOLLAR has been weak as GROWTH CONCERNS ABOUT CHINA HAVE LED TO THE LONG HELD BULLISH POSITIONS BEING LIQUIDATED. The Australian economy has been a proxy for Chinese growth but recent concerns about China have forced investors to rebalance portfolios. More importantly–at least from my view–has been the move in the Aussie 2/10 yield curve.
After last month’s meeting I advised that the flat Aussie curve was predicting that the RBA was too tight and that a cut was needed. When I wrote that, the 2/10 curve was a flattish 35 BASIS POINTS. As of Friday’s close, the curve is now 61 BASIS POINTS and the recent BULL STEEPENING is indicating that the RBA will be cutting rates tomorrow night. A BLOOMBERG SURVEY OF 24 ECONOMISTS have a unanimous NO CUT opinion, but if the recent steepening in the AUSSIE curve is as predictive as I think, then an OFFICIAL CUT IS IN ORDER for the market has already moved the short-dated interest rates.
If the RBA doesn’t cut, then the AUSSIE DOLLAR OUGHT TO RALLY. If it cuts only 25 BASIS POINTS then the post-statement movement will be interesting: A sharp break off a 25 basis point cut would be short-lived as the market has already called for that to happen. As an aside, since the AUSSIE 2/10 curve has begun to STEEPEN, the AUSSIE EQUITY MARKET HAS HAD A NICE RALLY. Also, it will be important to read Governor Stevens’ view on the Chinese economy and the impact of a strong AUSSIE DOLLAR on the non-commodity part of the AUSTRALIAN economy.

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5 Responses to “Notes From Underground: At the End of Q1, Global Equity Markets Are Floating on a Sea of Liquidity”

  1. jeditrader87 Says:

    Thanks for the post Yra.

    There are a lot of interesting things going on around the world and i am particularly focused on the EuroZone right now. There were reports on Friday that the Bundesbank would no longer accept bonds as collateral from Portugal, Greece, or Ireland. Apparently these are now claimed as false reports and they have the right to not accept bonds from banks throughout the EU, but cannot refuse sovereign bonds. ( Although it would have been a much bigger story(catalyst) if the Germans decided to no longer accept specific sovereign debt from other EuroZone members, this is none the less a major indication at their lack of confidence in the EuroZone.

    This is obviously not a good thing and can cause further rifts in policy for getting the EuroZone out of this crisis. All I know is I am tracking the currency for a good shorting opportunity. I am assuming using the USD cross to execute this is best seeing as capital has been flowing to the USD as a flight to safety, but maybe the Canadain dollar would be a better move due to it’s stability and lack of QE. What do you think?


  2. Danny Says:


    Good catch on the potential shift in Mexico. It will no doubt be a tricky one to call because as with any mediocre politician they will talk the talk but it will be task to find real evidence they are going to walk the walk on economic reform. One interesting dynamic that will potentially play into this is the implicit option value of their energy production in that…they have experienced a relentless decline in oil production due to outright investment neglect meanwhile the value of their potential oil production has grown dramatically with rising prices which in theory should make reform more and more compelling. But I do think there may be cause for concern that their most productive fields have been so under-invested/neglected over the years that they may be impaired for a long time – if not forever (which is hopefully not the case). It will definitely be a good one to watch.


  3. yra Says:

    Danny–good point as the Mexican treasury and budget are dependent on energy revenues for I believe 45% of the budget so it is getting to the time where serious decisions have to be made–won’t have the Cantrell oil field for ever.This is why Governor Carstens has weighed–no PUN intended.

  4. yra Says:

    Jedi—the EUR/CAD cross has been a tough trade.From a near term fundamental view it makes all the sense in the world.The Canadians have done many things right but as Mark Carney voiced today–there is concern over the high value of the currency.Also,the increase in private sector credit growth is deemed a problem by the government and how they resolve that issue may weigh on the currency—there will be no more rate cuts but what macroprudential tools they utilize will be interesting.

  5. WreckEmFinance Says:

    So what links are the best to review the information referred to in your blog? Is there an RBA official page where I can read Governor Stevens’s pronouncements? So much gosh durned information to keep up with, it seems overwhelming at times.

    Additionally, how does Mexico’s entrenched culture of political corruption affect Mexico things? Could it ever evolve to a less corrupt, more free-market oriented system?

    Apologize for my naivety, I’m pretty new to the fundamental analysis game. I’m glad my prof referred me to your blog though.

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