EUR 22.10 For Business Accounts Only

The Weekly Track too-early

- The Weekly Track - Too Early by Bob Savage
http://track.com/articles/the-weekly-track-too-early/

The central question for the summer continues to be whether rate normalization in Europe and elsewhere will derail the global recovery and prove the liquidity trap fears that permeated all markets since the great recession. Moving from extraordinary policy to just plain accommodative isn’t scary. What seems to be terrifying is the terminal rate in the new normal world where low productivity, ugly demographics and a savings glut leave little room for central bankers to find much cushion in traditional policy. Many argue that the ECB fears of tapering are well overplayed, rates are still -0.30% and QE is ongoing until the end of the year. Tapering QE is widely expected for 2018 but rate policy shifts are less clear – and with oil below $50bbl, the inflation that started 2017 won’t be so kind to the ECB target to the end of the year – making many think it’s just too early to worry about central bankers doing much harm to markets. The problem is that if the US 10Y
is 2.38% while the German 10Y is 0.57% - the terminal rate expectations for the US at 2.50% or 2.75% are rational but the ECB end rates at 0.75% or 1% seem extraordinarily out of line to inflation and so the risk is for a much bigger bond pain trade in Europe continues. The unwind in EM FX and bonds was collateral damaged to this move with many wondering if the low volatility, stretch for high yield is going to continue to unwind. Equities seem far less concerned than bonds but both are in a very different technical place now than in June. The fear of a larger shift continues even as summer seems certain to bring far less obvious changes to markets. The chart that makes this point most clearly is that of oil against the German 10Y rates – the lack of correlation – seems unlikely to last.