The main motivation behind this post is to define where markets will trade in the coming months. Remember I do not day trade, I trade themes based on macroeconomic events. The macroeconomic picture is muddled and very difficult to define at this point, but we shall attempt to crack it and see how we go.
Firstly with slow growth, high unemployment and limited room for manoeuvre regarding macroeconomic policy space, structural reforms are the short-run remedy to spur growth and boost confidence.
We see a graph by the OECD that confidence in the U.S has picked up but at plateau levels and difficult to determine where US confidence will go from here considering the nations government debt profile.
In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis.
Recovery in the healthier economies, is not strong enough to offset flat or negative growth elsewhere in Europe.
Adjustments in the euro area are now taking place in an environment of slow or negative growth and deleveraging, prompting risks of a vicious circle involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth.
As we are already aware the situation in Europe is very poor and there is no end in sight.
However, as global growth expectations have come under pressure as economic momentum has considerably weakened. In the absence of a genuine European shock from here one can expect U.S and China to lead the global economy in the second half of 2012.
Softer US economic data in recent months has largely been the result of statistical implication of a warm winter. Signs of improvement in housing, falling energy prices and OK consumer demand suggest the recovery hasn't completely fallen off the proverbial cliff.
Commodity markets are currently heavily oversold on the double whammy of slower growth momentum [as per China] A stimulus policy in China will be favourable to commodities but will highly impact input costs and hence the falling value of Chinese exports. The latter should be seen in early 2013 as China stimulates which leaves room for a multi month commodity rally until early 2013, on the proviso of no other European shocks.
It can be easily argued the U.S 10 year bond yield has traded into cyclical lows at 1.44%. My personal belief taking global debt swallor into consideration with little impact on reforms will eventually trade vastly lower and we shall eventually see a re-make of Japan's JGB market. However a move into the shaded areas as yields revert to their mean is also a highly probable scenario, in particular if China decides on a stimulus policy. There is a clear disconnect between USD and U.S 10 yr yields and this disconnectness will continue as flows from debt to risk will be the story.
References -
-OECD economic outlook http://www.oecd.org/document/18/0,3746,en_2649_37443_20347538_1_1_1_37443,00.html
-ANZ research quaterly http://www.anz.com/resources/d/d/dd076e004babd2058c3eeec96010cd62/ANZ-Research-Quarterly-June-2012.pdf?CACHEID=dd076e004babd2058c3eeec96010cd62
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