Market commentary - June 2014
With the ECB June meeting on the June 5th it may be a little too late to discuss their options but it will almost certainly involve some form of quantitative easing (QE) although with a similar degree of certainty we can say that they won’t call it that! If they don’t cut rates, introduce additional measures to provide liquidity (QE) and introduce another scheme to get the banks lending again then the markets will be heading south tout suite.
Remarkably, since Draghi uttered the words “the ECB will do whatever it takes”, they have in fact had to do very little. QE as practised by the Federal Reserve has been suggested as unconstitutional by the German courts so the ECB have declined from pulling that lever and have just gently massaged interest rates down by a few basis points. They have done nothing in a material way to account for the extraordinary fall in Spanish bond yields (Italy, Greece and Portugal too) other than talking about the implied call to action.
Not only has the hedge fund community found a “guaranteed” way to make money but it has kept a number of major European banks, that held significant piles of South Med debt, solvent. You would have to say looking at the chart that the chances of yields going much lower look remote. To put it all in context, with Spanish 10 year yields at 2.8%, US and UK yields are currently 2.5% and 2.6% respectively. It looks like a case of buy on the rumour - July 12th 2012 – and sell on the news – June 5th 2014.
The other central bank toying with QE, the Bank of Japan (BoJ), appears to have gone to sleep on the job. The economy is seemingly dropping off a cliff not helped by the 3% sales tax hike in April instigated by Abe’s predecessors. We have discussed before the imperative need for reform in the economy not least of all around wage bargaining and getting the increasingly profitable Japanese companies to dispense some largesse to the work force. It looks as far off as ever so the PM may have to persuade a reluctant BoJ to start printing some more yen.
Around the world, for most of May, bond yields have headed south and stock markets have been on the up, with the S&P 500 making another new weekly high at 1923.57 up 2% on the month. At this rate Jeremy Grantham’s target of 2,250 that we mentioned last month will be here before we know it! However the summer doldrums usually take hold about now so it maybe a case of enjoying what little sun we seem to be getting in the UK and preparing for some volatility in the autumn, assuming that the global politicos can refrain from starting yet another theatre of conflict.
Clive Hale, Director - June 2014
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