Un léger mieux pour l’euro et les actions, une semaine de baisse pour les obligations: merci la BCE! Mais cela suffira-t-il? Le prochain gros test pour les marchés aura sans doute lieu le 2 août, avec une émission d’obligations souveraines espagnoles. Les investisseurs suivront aussi les commentaires des patrons de la Fed et de la BCE…
En attendant, la revue de la semaine résumée par Jan Loeys, de JPMorgan, et son équipe.
« Our overall strategy remains on course, with a focus on mid-risk assets, riding a course between low-yield cash and government debt on the low-risk side, and cyclical equities on the high-risk side. We thus prefer better-yielding equity-like bonds and bond-like equities, or corporate and EM bonds and defensive, higher-yielding equities. This strategy assumes low economic and earnings growth, with modest downside, but no recession, and continued monetary easing across the world. We will be wrong, if we get either much higher world growth and/or inflation, or a slide into a global recession.
We will also be wrong if policy makers suddenly find the will and the means to become a lot more effective in boosting growth. DM fiscal authorities remain in deleveraging mode, subtracting over 1% from US, UK, and Euro area growth this year, and likely also next. There seems little appetite to abandon fiscal discipline currently, but we should be on the look out for any policy shifts.
The Fed could again reach deeply in its tool bag, likely rate communication next week and QE3 in September, but is in our mind running out of ammo, and thus unlikely to come up with much that improves the economic outlook.
Euro area policy makers surely have the means to reverse their recession and sovereign debt crisis, as they caused them, but seem to remain too conflicted and divided to reverse conditions. Next week, the ECB looks set to announce it will buy periphery bonds again, but unless it enters with overwhelming force (shock and awe), investors will likely use the opportunity to unload bonds to them. Today’s rally in equities and sell-off in bonds comes on speculation that ECB President Draghi will upgrade the old SMP program into real QE, just as he upgraded last year’s liquidity injections into a massive LTRO. Given Europe’s policy maker unerring ability so far to disappoint at each juncture, we are in wait-and-forever hope mode.
EM policy makers do have enough ammo, but do not have the mandate to save the world economy and will thus likely only provide modest easing that should reverse EM weakness over the next year, without huge impact on DM economies.
Without a change in views, we look below at some of the main questions we are getting from you. They are all variations of the theme “Why so low?” and each is addressed as concisely as possible.
First, why is world growth so low? This is so far the weakest expansion since WWII. History shows deeper recessions produce stronger rebounds. But not this time. One explanation draws on the work of Reinhard and Rogoff that shows growth remaining weak for 1-2 decades in the aftermath of major financial crises. Quite likely, after a crash, economic agents become more cautious and focus on repairing balance sheets. In addition, policy makers can’t do as much this time as fiscal authorities also need to repair balance sheets while monetary authorities have run into the wall of zero interest rates.
Why are trading volumes so low and still falling ? Many investors say they lack conviction, and find it harder to gauge value and market direction amidst so much political uncertainty. This uncertainty is breeding inactivity. The steady rise in correlations between risk assets (chart on right) is making it harder to find diversified sources of alpha. US equity managers are having their worst year, since 1995, in trying to beat the S&P500, underperforming on average by 1.11% YTD. Hedge fund managers have delivered only some 2% YTD, after fees, pushing them way down in the YTD return hit parade on p. 1. This lack of active returns is forcing many to stay close to their benchmark and to take less risk.
Why is market volatility so low, if uncertainty seems so high? We tend to equate uncertainty and market volatility. This is likely brought on by the same forces that are keeping trading volumes and risk taking low: high macro uncertainty. In fixed income, volatility is also naturally depressed as yields approach the zero wall.
Why are credit spreads not much lower? We discuss this at length in Flows & Liquidity. In a nutshell, spreads are wide for this point of the cycle as macro uncertainty is higher than normal (which has also pushed equity premiato record highs); the spread-only investor has become a smaller part of the market; financials, that form a large part of the credit market, have experienced a structuring repricing to higher spreads; and there is now higher name concentration among financials. »