Over the past week or so, I’ve noticed some interesting posts on the disconnect between the markets and the broader economy at large while I’ve been out on the road. And what makes it so interesting is the perspectives they offer are almost diametrically opposed to each other.
Consider this piece from Bloomberg:
Europe’s sovereign debt crisis has created an environment in which investors are dwelling on negative developments even when data show economic recovery, the Bank for International Settlements said.
“Against this background of heightened uncertainty, market participants focused on the deteriorating financial-market conditions while often ignoring positive macroeconomic news,” the Basel, Switzerland-based BIS said in its quarterly report today. “The April jobs report, for example, saw U.S. non-farm payrolls increase by 100,000 more jobs than expected to 290,000, but the S&P 500 Index fell by 1.5 percent on the day.”
So on one end of the spectrum, we have the BIS complaining about the markets eating their homework. Markets aren’t paying attention to improving economic data, they say. They look at the charts for risky assets with a combination of weeping and gnashing of teeth, it seems:
Now let’s contrast that with a sharp piece I read over at the FT Alphaville blog:
And as we noted earlier this morning, the 10-year Spanish/German bond yield spread has widened to a lifetime high following (firmly denied) reports that EU, IMF and US Treasury officials were drawing up a liquidity plan for Spain.
Yet, the equity market seems very relaxed, something that wouldn’t have been the case a couple of weeks ago. So what’s the answer?
Perhaps, it’s a case of eurozone news fatigue.
Perhaps investors have managed to convince themselves that the problems in the eurozone won’t derail the global economy.
First, let’s look at the differences in timeframes. The BIS paper covered the quarter, whereas the FT Alphaville piece covered the past week or two.
But the critical piece (to me, anyway) is the idea of eurozone news fatigue that the Alphaville piece stated. Indeed, between the relentless negative news out of Europe and the BaFin ban, it’s probably a logical assumption that we have reached some sort of exhaustion point in negativity. Just take a look at the EURUSD chart:
And yet I’m not all that convinced that the Spanish debt auctions were that great because of this:
At a closely watched auction for 12- and 18-month bills on Tuesday, the Spanish government raised 5.2 billion euros ($6.4 billion). The rate of 2.3 percent on the 12-month bills was a sharp rise of 0.7 percentage point from what it paid last month and significantly higher than in other major euro zone economies.
The higher rates spurred fears that Spain’s financing costs could soon become too great for the economy to bear. Reports in the German press have suggested that Spain might become the first country to tap into the European rescue fund that was set up after Greece received its own package of loans from the International Monetary Fund and Europe, a possibility that has been emphatically denied by Spanish and European Union officials.
Also there’s this:
But getting back to the economic point of view from the BIS, we have lagging data points that pointed to some signs of strength, which may have already come and gone. Indeed, there’s this snippet from the BIS report:
Inflation expectations over this period remained well anchored in major advanced economies. In many cases, realised inflation data surprised on the downside – the United Kingdom being an exception – with US consumer prices dropping unexpectedly in April. Break-even inflation rates were broadly stable in the United States and the euro area, as indicated by the pricing of inflation swaps (Graph 10, left and centre panels). Moreover, inflation derivatives prices showed no sign of increased concern about high inflation outcomes; prices of euro area and US five-year out-of-the-money inflation caps have been stable or declining since the start of the year (Graph 10, right-hand panel). These indicators contrasted with market commentary that the ECB’s decision to purchase euro area sovereign bonds might damage its inflation-fighting credibility.
I don’t know, but I get a sense of incredulity in their tone. Exasperation, perhaps. But here’s the graph they referred to, so you can see exactly what they’re talking about:
But markets don’t operate in a linear fashion. And when all you have is a two-dimensional chart to look at, there’s a lot of context that can be missing. That’s not right or wrong, that’s just a fact. And it’s also a fact that in trading a lot of that context doesn’t matter: price is the final arbiter.
The other thing is markets are asynchronous. They don’t always move together at the same time, with the same level of intensity. So for a person like me that tends to take a global macro view of the world, it’s a bit of a challenge to interpret the importance of relative currents/cross-currents at times. Right now is one of those times where it seems like it’s more challenging, because we don’t know what is going to move the markets at the moment.
So I feel like we’re in some semblance of the summer doldrums. There’s been a lot of volatility, and while some markets have leaned in one direction while others have leaned the other way, it all just feels like a great big push in Blackjack terms. Maybe I’m right, maybe I’m wrong. But to get the clarity we want and need, there has to be a catalyst; a spark that sends things higher or lower.
I’m not sure what it will be, but I’m dying to find out.
In the meantime, go over to Minyanville and check this out from Todd Harrison. Great stuff to think about.