Weekly Radar: May days or Pay days?
So, it’s May and time for the annual if temporary equity market selloff, right? Well, maybe – but only maybe. A fresh weakening of the global economic pulse would certainly suggest so, but central banks have shown again they are not going to throw in the towel in the battle to reflate. The ECB’s interest rate cut today and last night’s insistence from the Fed that it’s as likely to step up money printing this year as wind it down are two cases in point. And we’re still awaiting the private investment flows from Japan following the BOJ’s latest aggressive easing there.
So where does that all leave us? A third of the way through 2013 and it’s been a good year so far for nearly all bulls – both western equity bulls and increasingly bond bulls too! Not only have developed world equities clocked up some 13 percent year-to-date (the S&P500 set yet another record high this week while Europe’s bluechips recorded a staggering 12th consecutive monthly gain in April) , but virtually all bond markets from junk bonds to Treasuries, euro peripherals to emerging markets are now back in the black for the year as a whole. For the most eyebrow-raising evidence, look no further than last week’s debut sovereign bond from Rwanda at less than 7 percent for 10 years or even newly-junked Slovenia’s ability this week to plough ahead with a syndicated bond sale reported to already be in the region of four times oversubscribed. For many people, that parallel rise in equity and bonds smells of a bubble somewhere. But before you cry “QEEEEE!” , take a look at commodities — the bulls there have been taken a bath all year as data on final global demand hits yet another ‘soft patch’ over the past couple of months.
So is this just an idiosyncratic random walk of asset markets (itself no bad thing after years of stress-riven hyper correlation) or can we explain all three asset directions together? One way to think of it is in terms of global inflation. If QE-related inflation fears have been grossly exaggerated then pressure to remove monetary stimulus or wanes again and there may even be arguments – certainly in Europe – for more. This would intuitively explain the renewed dash for bonds and fixed income in general even in the face of the still-plausible, if long term, “Great Rotation” idea. You could argue the monetary free-for-all is buoying equities regardless of demand concerns. But why wouldn’t commodities gain on that basis too?
The answer likely lies in the desperate demand among big institutional investors for income in a low-growth, QE-buoyed world. The paltry income left in ‘safe’ bond markets becomes less unappealing if the inflation horizon is lower than we thought and from there the push for more yield fuels all bond markets. Similarly this year’s equities rally has been remarkable because it’s been led by income-like, blue chip defensive stocks with decent dividends that ape bond returns – and not by growth stocks or even emerging markets, which still remain in the red.
And if income is the only game in town and there’s no inflation scare, then the last place you want to be is income-less commodities.
So, what’s up next week? Tomorrow’s US payrolls report set the tone. But next week throws up a G7 meeting, heavy UK/European earnings sked, Chinese trade and inflation, BoE meeting and US/German bond auctions.
GLOBAL DATA/EVENTS TO WATCH
Malaysia general elections Sun
Europe Q1 earnings Mon: AXA, BCP, Natixis
EZ April services PMIs/March retail sales Mon
French debt auction Mon
Australia rate decision Tues
Europe Q1 earnings Tues: HSBC, Lafarge, SocGen, Pirelli, , Commerzbank, Adecco, Banca Generali, Carlsberg, Credit Agricole,
Swiss Q2 confidence, April jobless Tues
French March trade and industrial output Tues
US March consumer credit Tues
US 3-yr debt auction Tues
China April trade data Weds
Europe Q1 earnings Weds: Deutsche Telekom, CRH, Aegon, ING, Dexia, Henkel, J Sainsbury, Next, Standard Chartered,
German 5-yr bund auction Weds
German March industry output Weds
Madagascar Presidential Elections Weds
Norway rate decision Weds
US 10-yr Treasury auction Weds
China April inflation Thurs
SKorea/Malaysia/Egypt rate decisions Thurs
Europe Q1 earnings Thurs: Barratt, Beazley, WM Morrison, Old Mutual, Repsol, Tullett Prebon
UK March industry and manufacturing Thurs
Bank of England rate decision Thurs
US 3-yr Treasury auction Thurs
Europe Q1 earnings Fri: Unicredit, ArcelorMittal, TUI
German/UK March trade, Italy March industry Fri
G7 finance ministers and central bank governors meet in London Fri/Sat
EBRD meeting in Istanbul Fri/Sat
Pakistan general elections Sat
Bulgaria parliamentary elections Sun