The global reaction to the first round of the French presidential election was not confusing. Capital was sitting on the sidelines as the polls reflected a possibility of a second round Le Pen/Melenchon faceoff, which would have been devastating for global investors because fear of an EU break-up would have led to a massive repricing of risk premia. The avoidance of such an outcome led to a rush of capital into European markets, which provided support to Asia and the U.S. The German/French 10-year spread reacted as expected. The yield differential narrowed by a significant 20 basis points. The BUND yields rose against all European sovereign debt as Berlin’s haven status was rendered null and void for at least another two weeks. The GOLD and YEN also performed as expected as money rushed to purchase a risk on profile in a global zero interest environment. The EURO rallied by 2% as global capital flows into European stocks forced previous short euro positions to the sidelines. There’s nothing confusing about any of these outcomes. But let me throw some confusion onto some of the other geopolitical events making the front pages:
Posts Tagged ‘French oats’
Notes From Underground has been concerned that 2017 would be the year of Europe as the ECB’s quantitative easing policy and NEGATIVE interest rates would be an issue for many of the elections taking place this year. The Dutch, French and Germans will hold parliamentary elections. Those following the mass media will be focusing on immigration while NFU will continually seek to underline the importance of the repressive financial policies of the ECB. It is this narrative we will use to take the pulse of potential upheavals to the status quo. There is no doubt that the opposition to President Draghi is growing. In a threat to the Empress of Europe, Angela Merkel, received news that her coalition partner, SPD, has overtaken her party in the polls.
The four living Fed chairmen have gathered in New York for a panel discussion for International House. News Flash: The discussion was disappointing as the moderator had too much censoring power at his discretion about who would answer the audience questions. Paul Volcker had a great response regarding concerns about the Chinese yuan replacing the dollar as the world’s key reserve currency. Volcker said if the U.S. would qualitatively deal with its responsibilities it was not a concern but would probably represent the Chinese becoming a real open economy. Also, Greenspan let it be known that the dual mandate is a nice talking point but the reality is that the FED does not make decisions in a vacuum. After Greenspan’s answer Yellen basically agreed. The moderator should have allowed Yellen to answer first since she is the sitting Fed Chair. Allowing Greenspan to answer first diminished Yellen’s response. Overall, the discussion was … meh.
In the midst of a dramatic seven-day bond selloff, extending from Tokyo to Frankfurt, London, New York and all bond markets in between, Chair Yellen chose today to add verbal fire to stoke the bond rout. In the early hours GLOBAL BONDS had tried to stage a rally from the previous days of endless selling. (It seems that the ECB was in buying European peripheral bonds from Spain and Italy.) Once Yellen began her remarks the BOND onslaught began anew. The key paragraph in the Yellen interview: “We need to be attentive–and are–to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up and we could see a SHARP JUMP IN LONG-TERM RATES” (emphasis mine). Upon the utterance of those six words the markets took note and the selling of all bonds in Europe and the U.S. accelerated.
The last seven weeks has brought out the bond bears in the forms of Bill Gross, Jeff Gundlach and also well-known stock picker and financial wizard, Warren Buffett. While Gundlach and Gross were very bearish on the European sovereign debt markets, the Omaha denizen opined on how stocks may be rich but bonds offer a terrible risk/reward return. Large bond investors are nervous that they have possibly bought an overvalued asset and may experience sizable losses on a quarter-to-quarter to basis. The problem for pensions, insurance companies and those saddled with a defined payout obligation, the FED and other central banks have broken the bond market as a value barometer so it is very difficult to match assets with potential liabilities.
Notes From Underground: The Fed’s Zero Rate, Quantitative Easing Policies Are Stock Market FundamentalsMarch 10, 2013
The continued parade of stock market analysts who proclaim the equity market is rallying merely on Fed monetary policy instead of market fundamentals have spent far too much time doing case studies and not reading economic history. Interest rates as the variable signaling the cost of money are a very critical element and a key fundamental of the economy and especially the equity markets. U.S. multinational corporations are sitting on record piles of cash and also reporting strong profits. Much of the growth in profits can be attributed to two factors: Very low borrowing costs and continued pressure on wages. The FED has created the low interest rates and has hoped that the profitability resulting from low borrowing costs would bleed into higher wages and thus the need for increased hiring. The problem is many fold on the lack of success in aiding jobs creation. Globalization has kept pressure off wages and the deleveraging of the private balance sheets has meant that downward pressure remains on demand.