After a tumultuous fortnight where the European Central Bank, U.S. Federal Reserve, German judges and Dutch voters combined to markedly lift the mood on financial markets, we’re probably in for a more humdrum few days, although a raft of economic data this week will be important – a critical mass of analysts are saying that after strong rallies, it will require evidence of real economic recovery, rather than crisis-fighting solutions, to keep stocks heading up into the year-end.
Ever since an epic financial crisis hit the United States in 2008, mainstream economists, most of whom utterly failed to foresee the oncoming train wreck, have been scrambling to introduce a financial sector dimension to their models. It was a conventional approach that detached the study of financial stability from macroeconomic variables, the narrative goes, that prevented the experts from seeing the build-up of an unsustainable housing bubble that, when it crashed, took down the economy down with it.
Sometimes, a week away from the fray can bring perspective. Sometimes, you miss all hell breaking loose.
My last day in the office saw European Central Bank President Mario Draghi utter his “we will do whatever it takes” to save the euro declaration. The markets took off on that, only to sag when the ECB didn’t follow through at last Thursday’s policy meeting.
(Corrects to show CRT is not a primary dealer)
Bond bulls are ready to charge after Friday’s July U.S. employment data, according to a survey by Ian Lyngen, senior government bond strategist at primary dealer CRT Capital Group.
The U.S. Treasury Department announced on Wednesday it would begin issuing floating rate notes (FRNs), even if such a new program is at least a year away from implementation. The rationale behind these short-term securities is to give investors protection against the possibility of a sudden spike in interest rates. The Federal Reserve has held overnight rates near zero since late 2008, helping to anchor borrowing costs of all maturities.
The G20 summit may have marginally exceeded the lowest common denominator of expectations with euro zone leaders pledging to work on integration of their banking sectors as part of a push towards fiscal union. But it’s not clear that a banking union will happen any quicker than we thought before.
German Bund futures have just had their second straight week of losses. This has left many scratching their heads given the timing – right before Greek elections that could decide the country’s future in the euro and the next phase of the euro zone debt crisis. That sort of uncertainty would normally bolster bunds, which are seen as a safe-haven because of the country’s economic strength.
If anything positive can be said to have come out of the global financial crisis of 2008-2009, it may be that the theory arguing major economies could “decouple” from one another in times of stress was roundly disproved. Now that Europe is the world’s troublesome epicenter, economists are already on the lookout for how ructions there will reverberate elsewhere.