Investors beware: risk is underpriced!
By Peter Rosenstreich
Central banks are suppressing the true price of risk in rates, which in turn are distorting all other risk measures. For instance, while Greece 2-year yields were at 9.5% seven months ago, now they stand at 2.67%. That is on par with dysfunctional Argentina’s debt and only 60 basis points above that of AA-rated New Zealand’s! Ok, the view is that Greece will be backstopped by the ECB (bolstered by German Chancellor Merkel’s pro-EU election platform and French President Macron’s speech yesterday in favour of EU integration). Nonetheless, investors should be wary of Central Banks ‘miracle solution’ for managing debt and avoiding default: the unadulterated creation of raw capital.
Concern about this is surprisingly low. The VIX index of volatility is trading at a modest 12, despite lingering concerns of nuclear war with North Korea. Capital continues to flow out of the USD and into emerging markets. The trend is accelerating, as Chinese trade data suggest, with a 5.5% year on year jump in exports and whopping 13.3% year on year surge in imports. This is boosting currencies such as the INR, SGD and IDR. However, we continue to “make hay while the sun is shining” however we are sensitive to the markets artificial comfort level.
So if there is no any longer credit risk, any return is a good return. Which is why shares in the Swiss National Bank stock (yes, the SNB is a publicly traded company) continues to rally. Printing francs to buy Euros and equities is a great business model.
Draghi won’t say, will Yellen?
By Arnaud Masset
The European Central Bank did not change any of its key interest rates yesterday while announcing a continuation of quantitative easing (QE). ECB President Mario Draghi passed on an opportunity to talk down the steadily appreciating Euro and to say when QE would finally end. EUR/USD spiked to $1.2059 during the press conference and continued to rally during the Asian session, hitting $1.2092.
The next fork in the EUR/USD road will come on 20 September, when the Open Market Committee of the US Federal Reserve next meets. The Fed’s programme of interest-rate hikes seems to be on hold: the market is not pricing in any increases before 2018. On Friday the greenback kept losing ground against most of its peers as US rates dipped. The dollar index slid to 91.01, its lowest level since January 2015.