The cyclical recovery in Europe is real and will likely have further to go in the second half of this year. However, amid upbeat cyclical indicators, it is important to keep a close eye on developments in the periphery and in particular Spain. The process of clearing bad debts is far from over in our view and the idea that Spain has, “turned the corner” lacks logic and evidence.
Industrial production in the G7 has edged up further and this is in accordance with the OECD LEI diffusion index. G7 industrial production is now growing again and based on the upturn in the OECD LEIs observed since late last year we would expect economic activity to be well supported in the next 3 months.
Since tapering discussions pushed up yields in the US, this has led to a steepening of yield curves across the developed world. The US has seen the greatest steepening, which argues for higher growth in the US ahead. However, the…
Data in the UK has been broadly positive, with much fanfare over revised GDP data showing the UK avoided the dreaded ‘double dip’. This is a trivial distinction; the reality is the UK is still bumping along the bottom. Manufacturing…
Most of the talk on US equities is still centered around whether and when the Fed will start scaling back its asset purchases (let alone start raising rates). The point here is of course that if the Fed decides to remove the punchbowl, equities will take a dim view.
One of the points that we have emphasized to clients in our most recent reports has been the risk of a reversal in the USD. Fundamentally, the USD looks better than most, but nothing goes up in a straight line and speculators have been complacently long.
Our leading indicator for Brazil continues to imply significantly higher growth in Brazil and the economy is starting to respond. Of course, recent positive growth surprises have taken a backseat to the increase in EM market volatility . The Brazilian real has weakened, equities have sold off and yields have risen driven by a rise in US 10y yields. That together with a hawkish central bank has added to the squeeze on economic activity.
No-one ever said that investing was easy, but when textbook correlations start to break down it can be outright painful. Such of course has been the environment in recent couple of months with stocks and bonds falling in unison. It won’t last forever, but it may persist for a while longer.
We have been warning clients in the past few months that volatility was set to rise towards the middle of the year. We have been flagging the almost parabolic increase in margin debt as well as our leading indicator for equity volatility.
The underlying outlook for inflation in the US continues to point to upside risks in the coming years. Endless discussions between hyperinflationists and deflationists are boring and unproductive. We prefer to look at the data and the data is pretty clear.