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More volatility expected as Fed rate rise looms – Cumberland Advisors’ David Kotok

David Kotok, Cumberland Advisors

David Kotok, Cumberland Advisors

A healthy dose of fear has re-entered financial markets in the final three months of the year. The Chicago Board Options Exchange VIX, a widely tracked measure of market volatility, rose to a two-month high on Wednesday.

Varying news reports offered threats from the Ebola virus and a stagnating European economy as tangential reasons. Perhaps another point is many investors view the U.S. Federal Reserve’s pending decision to raise interest rates as a rumbling train far off in the distance that they now hear headed their way. Closer to the horizon are headlines that can no longer lean on “Fed easing” to explain away rising asset prices and a rising stock market.

“We are in a new period of volatility and it's been developing for the last two or three months,” David Kotok, chairman and chief investment officer of investment advisory firm Cumberland Advisors told the Global Markets Forum on Wednesday. “When you suppress all interest rates to zero you dampen volatility and you distort asset pricing. Now the outlook for interest rates is changing so we are restoring volatility.”

The changes, he said, are evident in a rising U.S. dollar, falling commodity prices and the spread between the high yield and U.S. bond markets.

“These are examples of how things change when you return to more normal volatility and extract and stop monetary stimulus,” Kotok said.

Beware the bias in euro zone forecasts (again)

Next time you ask an economist a question about the euro zone, be sure to enquire where their head office is based.

London? New York? Expect a pessimistic response on euro zone matters.

Frankfurt? Paris? Happier days are coming soon for the currency union.

So that’s oversimplifying matters slightly – but as we’ve seen time over, institutions based outside the euro zone are likely to be gloomier about its prospects, and those based inside it are more likely to look on the bright side.

That pattern was clear to see in this week’s Reuters poll on the euro zone’s vulnerable quartet – Greece, Ireland, Portugal and Spain.

Austerity fatigue – the financial world’s latest fad phrase

From the U.S., we’ve had lots of talk of tapering. In Europe, the latest fad phrase in the financial world is “austerity fatigue”.

It’s a strange euphemism, somehow disconnected from reality. More than 19 million euro zone citizens were out of work during May, roughly equivalent to the combined populations of Belgium and Austria. Youth unemployment is on the wrong side of 50 percent in Greece and Spain.

Fatigue here really means growing desperation, a public railing against rounds of budget cuts and rocketing unemployment in euro zone countries.

Forecasts for the euro zone depend more on head office location than analysis

Ask an economist a question about the euro zone, and the answer will as much depend on the location of their head office as any analysis of the data.

It’s been noted before (herehere, and here), but economists and fund managers working for euro zone-based banks and research houses tend to be optimists about the euro zone. Everywhere else – including Britain, North America and the Nordics – they tend to be pessimists.

That familiar pattern was plain to see in the latest Reuters poll this week, as economists were asked on whether borrowing costs for struggling euro zone countries like Spain and Italy were likely to return to danger levels in the next few months.

Although it seems routine, rising euro zone unemployment is still shocking

 

Another month, another rise in the number of jobless in the euro zone.

As expected, the unemployment rate hit a new record 12.2 percent in April, according to Eurostat on Friday, meaning some 19,375,000 euro zone citizens are out of work.

That’s more than the populations of Austria and Belgium combined and almost a quarter are aged under-25.

However, it’s worth remembering that not so long ago, hardly any economists expected to see unemployment climb to these levels.

Want to know what the ECB is going to do? Watch the German PMI

A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.

That’s because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy  shifted back into reverse this month, against the expectations of economists.

And the one thing the ECB’s Governing Council never allows to pass is any sign that Germany, Europe’s No.1 economy, is floundering.

Hopefulness, not confidence, is spreading through the euro zone

Optimism in Germany is roaring and consumers across the euro zone are starting to become less gloomy. But the latest hard economic data are a reminder of the difference between confidence that things are going to get better, and the hope that they will.

For the moment, we only have the latter.

Friday’s German Ifo business climate survey topped even the highest expectations, as did the ZEW economic sentiment indicator on Tuesday. Euro zone consumer confidence improved this month too, and the mood in financial markets has been largely buoyant since the start of the year.

The hope is that will translate into a growing euro zone economy, but that isn’t happening yet.

The worst is over for the euro zone? Shh! Stop saying that!

Folklore and modern horror are replete with tales of people summoning  ghosts by recanting their name or chanting a particular phrase. Centuries ago there was Bloody Mary. The 1980s brought us the Evil Dead trilogy and Beetlejuice, while Candyman appeared in the 90s.

And in the 21st century there is the euro zone debt crisis, conjured repeatedly by the phrase from Europe’s leaders, “The worst is over,” and variations thereof.

French President Francois Hollande was the latest to tempt the crisis apparition on Wednesday night:

The euro zone: choose your own adventure

Forecasts about the future for the euro zone economy are starting to resemble a multiple-choice novel. Are you an economist working for an Anglo-Saxon institution? Then turn to p.65 — “Recession for the euro zone”. A German bank? Go to p.80 — “Happy days are here again!”

That simplifies the case slightly, but there’s more than a grain of truth in it. We’ve noted repeatedly that predictions about the euro zone are coloured heavily by whether someone works for an employer based inside the currency union or not.

In the past, analysts have been reluctant to forecast outright contraction for major economies.

An unpleasant surprise may lurk in euro zone GDP numbers

The euro zone economy may be doing far worse than most economists want to believe. That’s not good news for a central bank trying to rescue the single currency through a hotly-contested bond purchasing programme that has yet to get started.

The latest flash purchasing managers’ indexes, which cover thousands of euro zone companies, suggest the third quarter will mark the euro zone’s worst economic performance since the dark days of early 2009, according to Markit, which compiles them.

They predict the economy likely shrank by 0.6 percent in the quarter that finishes at the end of this month.