23/2/20: The 'Fundamentals' of the Financial Markets Are Hardly Changed by the COVID2019, So Far...

An informative chart via Holger Zschaepitz @Schuldensuehner on the Global equity markets impact of the continuously evolving threat of the nCov-2019 or #COVID2019 virus epidemic:

Looks not quite as dire as it might sound, folks.

• Global equities lost some $470 billion worth of market value this week. 
• Which is 0.537% of the market cap at the start of the week 
• The market is still up more than 3 percent year to date
• The market is massively up on 2020 to date lowest point (+3.7 percent)
• Most of the effect is in Asia Pacific - not to discount it, but it is material since AP region has much more capacity for a rebound (higher savings, investment and potential growth rates) from the crisis effects than slower moving advanced economies.

Looking at longer terms within the advanced economies, here is a summary of the major indices cumulative moves over the 1 week - 6 months time horizon in percent:

So far, no panic, but last week really does look ugly, unless one seriously thinks about the degree to which market pricing is divorced from economic fundamentals, as exemplified by the 6 months changes: 22.26 percent upside in Nasdaq? 15 percent in Germany? 13.43 percent in Japan?.. 

So let's ask two questions: Q1: Does anyone believe there are long term economic or socio-economic fundamentals behind the above numbers? and Q2: If the markets are pricing in monetary sugar buzz of Kiddies at Halloween  Bucket of Sweets proportion on the upside, how on earth can the same markets price some serious fundamentals on the downside? 

The markets gyrations are only tangentially - and only in the short run - relate to tangible news flows, like nCov-2019 statistics. And they sure a hell do not relate linearly to any data on GDP impacts of the epidemic. Because markets have not reacted to GDP figures since well-before the Global Financial Crisis hit. Worse, there is no logic that can explain why markets are reacting to nCov2019 promise of dropping interests rates and priming the global QE pump in an opposite direction to the markets reactions to all previous slowdowns in global growth. 

We are still dealing with the same 'clueless and buzzed' crowd of 'investors' who value Tesla at inverse of the company's manipulated core statistics, and Netflix at inverse of company's manipulated profitability metrics, and Apple at inverse of company's forward growth potential. We are still dealing with the same 'jittery herd' that slushes from one 'not QE' to another 'Abenomics breakthrough' to the fiscal policy moaning of the ECB, while stopping to slam some shots at the occasional 'take profit' Wild West saloon.  

Forget one week to next markets gyrations. The real impact of nCov epidemic won't be seen until we have the monetary policy reactions at an aggregate level. So watch this chart instead:

When this line heads North above 3-4 percent mark, the real markets data will come in. Indications are: https://www.marketwatch.com/story/all-star-economists-urge-fed-to-use-qe-and-new-tools-to-fight-next-recession-just-move-sooner-and-go-bigger-than-crisis-2020-02-21?mod=the-fed. 

16/10/19: Euromoney Risk Survey Q3 2019 Results

Euromoney analysis of Q3 2019 results for country risk surveys and risk outlook forward, with lots of comments from myself and others: https://www.euromoney.com/article/b1hjf7xr90tdkj/ecr-survey-results-q3-2019-us-china-canada-mexico-punished-by-tariffs.

1/10/15: Of global equities and Gold

Bloomberg's @M_McDonough just posted a fresh chart for major global stocks indices rebased to the start of 2015:

The scary bit is that this is in own-currency terms and that the rot is well beyond the EMs and China.

I cover some of these issues in a guest contribution to GoldCore's quarterly review for 3Q - read in full here.

25/6/2013: What the hell is going on in the markets?

Two charts from Pictet neatly illustrate the ongoing bonds markets correction:

My two cents on what's going on in the markets today:


Wednesday opening last week at the cusp of FOMC statements, US 10 years were  yielding ca 2.15%. and 4 trading days later, these were at 2.61% or 41 bps up. 30 years are up from the nadir of 2.83% on may 2 to 3.56% currently.

And what about the other QE-infused or enthused market? In just over 3 weeks, FTSE 100 is down 846 points, from 6,875 on 22 May.

Equities and bonds are moving same way? Why?

Because of three factors:
1) When bonds go down, with them goes down capital. Mandated investment vehicles and banks take a bit of a shower.
2) When US or other advanced economies bonds take a shower, Emerging Markets take a bath because of liquidity pull out to cover leveraged losses elsewhere.
3) When EMs and bonds tank, capital-backed leverage falls, so liquidity falls in the advanced markets too, dragging down all risk assets.

These are the tripartite consequences of a liquidity trap, whereby intermediated short-term funding underpins investment activities. Put differently, when humans have less cash (real economy slow recovery, coupled with tax and financial repression), while banks and other institutions have more cash (including, for the latter, via access to banks leverage against Central Banks funding), markets become correlated, even where hedges existed before, correlations turn positive. Where there is contrasting access to the same asset via both financial paper and physical or real assets (e.g. gold vs gold coins), the two diverge, with financialised asset moving in synch with other financial assets, while real/physical asset moving in the opposite direction.

Thus, Brazil's 30-year bonds (dollar-denominated) are down now more than 25% in recent weeks, and instead of flowing into safe havens or rather 'safer hells', the cash is being tucked away into reduced leverage, leading to the US bonds compression down and UK gilts erasing all gains made since October 2011 (when QE2 kicked in).

The only thing that behaves predictably so far is VIX, which has gone from low-flat around 13.6-14.0 between March 24th and May 24th to over 20 average since June 20th through today. Short term VXX index is up from 18.03 on May 17th to 22.81 today.

Not quite panic, but pressure… and pressure is a trigger. And FOMC, and the rest of the Impossible Monetary Dilemma, are triggers too. The point is, given the recent drama in bond markets and equities and EMs, triggers are dangerous in trigger-happy times. When you have lots of capital tied up in 'safe assets' and lots of leverage tied up on top of that capital, pulling the rug from underneath capital quality leads to accelerating cascades across the board.

This is bad news for strategies over the short-term, as traditional allocations based on previously stable relations between asset classes are broken down. Gold co-moves with equities and bonds and currencies. The good news: once financialisation of the long positions is unwound, leverage is reduced and repricing of 'bubble'-like assets (aka financialised assets as opposed to real assets) is finished, the stable relations will return. In the long run, we all are… well, in the long run.

15/1/2013: Risk Taking Up, Cash Down

In contrast to CFA members cautious optimism (see here), markets bullishness is hitting historical highs:

via @Pawelmorski

And understandably, cash is not the King (see second chart here).

20/8/2012: China's 'This Time It's Different' turn?

Two charts and a table that are really self-explanatory. All via http://macromon.wordpress.com/:

This time, it's clearly very different...