April 11, 2014

Global Macro 360 - Daily Note - When central banks move in opposite dircetions

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Here is an extract from today’s Global Macro 360 Daily Note. To read the full content click here to sign up for a One Week Free Trial.

two heads

 

Good morning,

If you ever wondered about the role of central banks and their liquidity policies in asset prices just contrast the fate of the S&P and US tech stocks with the bond markets of peripheral Europe.

As soon as the market appreciated that the Fed will be withdrawing QE, albeit gradually, one of the central pillars supporting the US stock market to these breathless heights began to wobble.

In contrast, European peripheral bond markets, in countries which are still largely recession bound and threatened by deflation, have rallied. The most conspicuous being the serial defaulter Greece.

As long at this remains the case, yields in the periphery, even at these low levels are underpinned by the “understanding” that the ECB will be the buyer of last resort.

Figure 1: Greek yields

Chart 1 11 April

Around the globe, equities continue to sell off and the VIX spiked ahead of the US Q1 earnings. JP Morgan has just warned that its results, out later today, will be much softer than expected because of losses on fixed income trading. This shot across the bows is causing analysts to reassess the profits of America’s big banks which will be released over the next few trading days.

Among the biggest banks in the US by deposits, JPMorgan Chase and Wells Fargo will kick off first-quarter results today. Next week, Citigroup reports on Monday, followed by Bank of America’s earnings on Wednesday. Two of the most prominent investment banks, Morgan Stanley and Goldman Sachs, finish up with their earnings both to be announced Thursday.

Elsewhere, comments from China Premier Li ruling out “short-term and forceful stimulus measures” in response to “momentary fluctuations in economic growth” knocked the Chinese market back circa 1.5%.

We took the opportunity to add to our short 5 year note investment at 1.56% yield (see below) looking for a move back to the 1.80% in coming weeks.

 

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