Let’s travel back in time.
The Bundesbank (German Central Bank) releases the 2nd quarter German economic data. Its GDP has shrunk by 0.2% and Germany could enter a technical recession if this trend holds during the third quarter.
The chaos starts.
The so-called yield curve inversion in bonds occurs for the first time in 9 years. Normally, investors demand a higher interest rate to invest long term than short term and that is why the governments offer higher yields for 10 years bonds than for 2 years bonds. But either when the Fed or the ECB are expected to cut interest rates significantly or when there are fears of the next future market behaviour , investing in long term bonds seems like a good idea, lowering 10 years bond yields and eventually inverting the yield curve. In other words, the 2 year bond yields exceed 10 year bond yields in the US.
Andrew Sheets, Head of Cross-Asset Management at Morgan Stanley affirms: ‘ The yield on the US 10 years debt fell below that of 2 years debt ahead of the recessions in 1991,1999,2000 and 2007 and hadn’t done so at any point since 2010 despite many market scares’.
As always, this decisive indicator goes unnoticed.
As predicted the ECB announces a 10bp further cut on interest rates to a record low of –o.5% and restarts its quantitative easing policy planning to spend €20bn every month in bond purchases. Usually, central banks find this measure effective to boost both consumer’s demand and economic growth. But, as a University of Michigan study asserts, this measure is associated with a worsening economy by the public which eventually decreases spending, the contrary effect of what we wanted. And stresses banking business model and impedes them to make profits and be riskier on their investments.
More chaos and impact on businesses expansion as the flow of money from the providers of capital to the users is significantly reduced.
And comes October…
…and with it the deep restructuring programmes big banks such as HSBC or Deutsche Bank plan to perform. The financial industry is not in its healthiest situation to face a crisis and this lowers confidence among investors who flee away from EM currencies to the US dollar, from equity stocks to commodities and from short-term bonds to long-term ones.
Nevertheless, Mr Trump who is a surprise box brings novelties with an update in his heated international relations.
The US and China have reached a tentative agreement for the first phase of a trade deal and are now in closer and friendly talks.
Mr Trump and Mr Jinping seem to start to get on well with each other.
And as if the financial market had amnesia, they forget about economic indicators, financial sector weaknesses and the business cycle stage we seem to be in and continue with the longest US bullish market ever in history. Of course, this feeling expands all over the world. Good times for speculators, I am afraid.
Companies unleash a wave of takeovers. Among others, LVMH (the conglomerate which owns Louis Vuitton) buys Tiffany’s for $16 billion; Charles Schwab buys competitor TR Ameritrade for $26 billion and Novartis buys The Medicine Company for $9.7 billion. In one week, more than $70bn in deals.
The goals: Searching new ways of growth, benefitting from cheap borrowing and defend themselves against the trade war.
IPOs or Initial Public Offerings (concept explained in the ETFs post) soar. Saudi Aramco, the state-owned largest oil company decides to open to private investment and achieve the biggest valuation ever: $1.7 trillion. Alibaba takes orders for a Hong Kong listing that will raise up to $13.4 billion according to Reuters even with the existing tensions there.
The effects of this unreasonable optimism start being visible in the whole equity market with the FTSE All world index (Source: Financial Times) climbing the stairs and receiving a great flow of investment from commodities and fixed income.
However, there is a more important and curious effect due to this excitement. The Nasdaq’s IPO listings are about to outpace the NYSE ones for the third year in history having raised $8bn more according to the FT. The first time was during the dotcom bubble and the second in 2012, not actually times anyone would like to repeat.
‘There is no shortage of inconsistencies about the current market narrative and the latest decline in Chinese industrial profits is another warning shot for broader risk appetite’ Mike Mackenzie on the FT.
Today, 28th November we knew how Chinese industrial profits dropped for the third straight month, accumulating a 9.9% slide this year which add to the list of previous warnings and new ( 13.5% growth in gold, Germany export growth to China at -8.2% YoY, retreat in 10 year US Government yields…) the market is ignoring.
History is repeated.
Disclaimer: Do not take any of the opinions shared here as Investment advice. Whenever you want to start investing make sure you do your own research and seek professional advice for any investment decisions you make in the future. Hope you enjoyed the read!
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