- Structural issues in the Eurozone which won't go away simply because the European Central Bank (ECB) is pumping 60 billion euros a month into the system
- The fact that the ECB QE program may run out of "debt paper" to buy as they are constrained in buying bonds with negative yields. The Eurozone is quickly becoming a negative yield bond market.
- Runaway Japanese money printing in their attempt to finally turn the tide against two decades of deflation which is inflating their equity market (ditto China)
- The "hiccup" in US economic growth which, with every passing day, is looking more and more solely weather related
- The impact of falling oil prices on leveraged debt in and around the oil and NATGAS industry
In the wake of the 2008 debacle, central banks have inflated risk assets in the hopes that eventually asset prices would spur broader economic growth thru capital investment, thereby generating employment and overall prosperity. Papering over trillions of dollars in lost wealth and debt was an experiment that was forced on central banks. To do nothing would have been to invite a deflationary depression which would have made the early 1930's seem mild. In a post 2008 world the central bank experiment has generated up to this point, only tepid and uneven growth. There are many factors that have contributed to this fact which are outside the scope of this commentary but which I've touched upon is past writings.
In my last commentary I stated that, at a macro level, the consuming economies in the West would have to lead us out of this global economic malaise we find ourselves in before we could start to see a significant pick up in economic activity in the developing nations of Asia and the Mid East. Simply, until Emerging Markets and China transitioned into true consuming economies, it was dependent on the West (US & Europe) to pull us out of this low growth, disinflationary to deflationary mire we find ourselves in. I've also specified that with ECB QE being implemented, we would start to see global growth accelerate around mid year. Well the Emerging Market complex seems to be giving us that signal already. Let me explain.
Many folks on the street have been concerned that as the US Dollar continues to rise, US Dollar denominated debt gets more expensive to pay off and emerging market countries, as a whole, are over exposed to US Dollar denominated debt. The following chart illustrates the problem:
In the chart above, the previous rise in 2014 in which emerging markets rallied with a positive correlation to the Dollar ceased when the Fed officially ended their QE program. Emerging Markets reacted as they had in the past to a strengthening dollar. But now the rise is accompanied by global expectations that the Fed will raise short term rates this year.
To sum up, with a Federal Reserve tentative about raising short term rates, the ECB and BoJ (Bank of Japan) flooding the global system with liquidity, muted inflationary pressures and expectations and an interest rate environment very conducive to borrowing for capital growth, equities have nowhere to go but higher. A twenty five or even fifty basis point rise in short term rates is not going to ruin the party. Yellen predicates any move on interest rates as data dependent. So, as it stands right now, if the Fed goes this year it will be in September and with only one bump of twenty five basis points.
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