Recap 2015-01-06

Commentary:

OK, so first I’ll acknowledge that my call to short duration a couple weeks ago was pretty bad. I think I’ve underestimated two things – the speed of the move in oil and the extent to which algorithms have come to dominate short term price action.

Note that this does not mean I think my short duration call is fundamentally incorrect. A correction of a few percent in equities from all time highs, in conjunction with a sharp drop in oil, does not support the idea that US long run nominal growth rates are likely to fall dramatically. The 2.47% low yield on 30y bonds is almost 150bps below the Fed’s expectation of the long run neutral rate. What’s quite interesting here is that in the US, the markets seems like it wants to fight the Fed. Despite the FOMC’s projections, the market seems convinced that the Fed will hike later, and/or will pause its hiking. In addition, market talk comparing Europe to Japan has been on going for a long time, but that scenario has now been broadly priced in. 30yr German Buxl yields are right on top of 30yr JGBs. Let’s take this in: the ECB hasn’t even started purchases yet, and the German curve is at the same level as the curve of a country where the central bank is likely to have a balance sheet in excess of 100% of GDP by the end of this year.

In any case, a number of factors suggest that a reversal in fixed income may be near. In addition to the fact that major asset classes are near support/resistance zones, as I noted yesterday, the daily treasuries price action exhibited capitulatory characteristics.

Note that US 30yr yields broke to new lows today, and are now around the lows last seen in 2012 and 2008:

I’m sticking to my expectation that yields will move higher over the coming months.

Separately:

Byron Wien’s Predictions for Ten Surprises is interesting as usual:

http://ir.blackstone.com/news-and-views/Press-Release-Details/2015/Byron-Wien-Announces-Predictions-for-Ten-Surprises-for-2015/default.aspx

Also very good, ICMI:

https://medium.com/@munilass/a-market-based-approach-to-infrastructure-investment-part-three-74ebf873b35f

Notable:

  • EU Services PMI was revised lower to 51.6 vs 51.9 prev, driven by Italy
  • Italy Services PMI declined to 49.4 vs 51.7 exp and 51.8 prev
  • UK Services PMI declined to 55.8 vs 58.5 exp and 58.6 prev
  • US Markit Services PMI was revised lower to 53.3 vs 53.6 prev
  • US ISM Non-Mfg declined to 56.2 vs 58.0 exp and 59.3 prev
  • Japan Services PMI improved to 51.7 vs 50.6 prev
  • China Services PMI improved to 53.4 vs 53 prev
  • ECB to discuss three bond buying options according to a report in Dutch newspaper Het Financieele Dagblad. The three options include: 1) buying government bonds according to national capital key; 2) buying only AAA-rated bonds; 3) forcing national central banks to buy their country’s bonds at their own risk. If the ECB announces its intent to buy bonds on 1/22, it isn’t certain if details of the plan will be unveiled at that time.
  • Greek leftwing opposition leader Alexis Tsipras said the European Central Bank (ECB) could not exclude Greece if it decides to move to a full "quantitative easing" program to stimulate the euro zone’s faltering economy. Speaking at a party congress on Saturday, three weeks before a Jan. 25 general election, Tsipras also said his Syriza party would ensure much of Greece’s debt was written off as part of a renegotiation of its international bailout deal… In a speech laced with barbs against German Chancellor Angela Merkel and finance minister Wolfgang Schaeuble, Tsipras said his party would roll back many of the austerity policies imposed by the bailout "troika". "Austerity is both irrational and destructive. To pay back debt, a bold restructuring is needed," he said. Repeating many policy pledges first laid out last year, he promised to do away with a real estate tax, freeze house foreclosures, raise the minimum wage and reinstate a 12,000 euro ($14,400) tax-free threshold to help low earners. He said he would abandon the goal of achieving primary budget surpluses, aimed at cutting Greece’s debt burden equivalent to more than 175 percent of gross domestic product. – Reuters

Upcoming:

  • Wed: EU Unemployment, CPI, US ADP Employment, FOMC Minutes, AU Building Approvals
  • Thu: BoE, Jobless Claims, China CPI
  • Fri: US Employment, Canada Employment
  • Mon: Japan Eco Watchers Survey, China Trade Bal
  • Tue: UKCPI, US NFIB Survey
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3 thoughts on “Recap 2015-01-06

  1. Welcome back.

    How much credence do you give to comments that pension funds are starting off the year again locking in equity gains and this price action then feeds upon itself throughout the market, esp. given the easy reasons of Greece/oil/weaker data to go risk-off?
    Personally, I find the starting point reasonable but because the argument seems to rely on some kind of ‘magnification effect’ re large fund flows, it becomes difficult to gauge exactly how important it is or when the equity -> bond fund flows might end.

  2. possible, but I don’t think that’s it. Yields ended the year near their lows. Equity valuations richened also, so on a net basis, flows should be small, or into equities even.

  3. Yeah, looks like I commented too early. Just saw a sell-side note addressing fund flows to start the year.
    Thanks.

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