Following are notes from our weekly editorial planner:
Oh the irony. Perhaps the best illustration of how things have changed over the past few weeks is that risk markets now fall when Spain is NOT seeking a sovereign bailout rather than when it is! The 180 degree turn in logic in just two weeks is of course thanks to the “Draghi put” – which, if you believe the ECB chief last week, means open-ended, spread-squeezing bond-buying/QE will be unleashed as soon as countries request support and sign up to a budget monitoring programme. The fact that both Italy and Spain are to a large extent implementing these plans already means the request is more about political humble pie – in Spain’s case at least. In Italy, Monti most likely would like to bind Italy formally into the current stance. So the upshot is that – assuming the ECB is true to Draghi’s word – any deterioration will be met by unsterilized bond buying – or effectively QE in the euro zone for the first time. That’s not to mention the likelihood of another ECB rate cut and possibility of further LTROs etc. With the FOMC also effectively offering QE3 last week on a further deterioration of economic data stateside, the twin Draghi/Bernanke “put” has placed a safety net under risk markets for now. And it was badly needed as the traditional August political vacuum threatened to leave equally seasonal thin market in sporadic paroxysms. There are dozens of questions and issues and things that can go bump in the night as we get into September, but that’s been the basic cue taken for now. The backup in Treasury and bund yields shows this was not all day trading by the number jockeys. The 5 year bund yield has almost doubled in a fortnight – ok, ok, so it’s still only 0.45%, but the damage that does to you total returns can be huge.
Where does that leave us markets-wise? Let’s stick with the pre-Bumblebee speech benchmark of July 25. Since then, 2-year nominal Spanish government yields have been crushed by more than 300bps… as have spreads over bunds given the latter’s equivalent yields remain slightly negative. Ten-year Spain is a different story – but even here nominal yields have shed 85bp and the bund spread has shrunk by 100bp. The Italy story is broadly similar. Euro stocks are up a whopping 12.5%, global stocks are up almost 7 percent, Wall St has hit its highest since May 1, just a whisker from 2012 highs. Whatever the long game, the impact has and still is hugely significant. An upturn in global econ data relative to recently lowered expectations – as per Citi’s G10 econ surprise index — has added a minor tailwind but this is a policy play first and foremost.
So, climate change in seasonal flows? Well, it was certainly “sell in May” again this year – but it would have been pretty wise to “buy back in June”. Staying away til St Ledgers day would – assuming we hold current levels til then – left us no better off had we just snoozed through the summer.
What can ruffle the feathers from here? We still have to see the China data dump this week, so fasten your seatbelts. But whatever the outcome there, the bounceback in oil prices of late may start to become a big drag for those hoping for a global energy boost. With Brent back to within 5 euros per barrel of its all time high, it’s about as welcome as kick in the teeth — even if it’s partly a price to pay for rekindled risk appetite.
There’s not a great deal to hang on next week as the August political/event lull sets in, which means the oil spike could grab more attention than otherwise and temper the bulls. Data watchers will home in on slowing euro area and Japan Q2 GDP numbers – the euro zone likely contracted during the quarter — even if the numbers are to some extent history already. The US housing starts/permits are one to watch given all the recent focus on a bottoming real estate market there. The Philly Fed will also update us on its bellwether gauge of business activity. The rest of the data set is interesting only on surprise. BoAMerrill releases its monthly fund manager survey. Turkey decides on interest rates.