After nearly six years of unprecedented intervention by the world’s top central banks, the world’s financial markets are hopelessly broken. What used to be accepted as market gospel and guided investors’ decisions in the marketplace, before the 2008 financial crisis, - no longer seems to apply in today’s marketplace.
A brief note today on what might be an arcane subject for some but is a great example of the most basic question in risk management — are you thinking about your risk questions in a way that fits the fundamental nature of your data?
The biggest sector weights of the major indices like consumer discretionary, technology, and financials were holding the markets back as they lagged more defensive sectors like utilities and consumer staples. However, these sectors are showing signs of life as their momentum is picking up steam and helping to push the markets higher.
The ECB brought out the monetary bazookas as expected and hinted their plans to do more in the coming months. We are likely to see the ECB’s balance sheet expand at a faster pace than the US Fed which implies the Euro should weaken relative to the USD in the months ahead.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
Suppose that all you knew was that the NYSE's daily cumulative A-D Line was at a new all-time high, or even a 3-year high. What would that tell you? Generally speaking, the A-D Line does well when liquidity is strong.
The economies of the developed world are improving; their housing markets are on the rebound and unemployment rates are sliding. On the monetary front, central banks remain accommodative, interest rates are at historic lows and the yield curve is steep.
The market was hit with a “significant (stimulus) package” today as Mario Draghi pointed out in his conference call. The head of the ECB also said that they aren't finished, which helped pushed markets into new record territory.
Crude oil prices have historically been an economic barometer that can indirectly indicate, and sometimes lead, upcoming direction in other financial asset prices. This can be seen in the periodic positive correlation between oil prices and the S&P 500 during the past decade.
One of the most stunning facts about the investment climate is the unusually low volatility throughout the capital markets. The reason that is increasingly worrisome is not just because trading profits of the major banks suffer or that hedge funds find it difficult to make money.