18 to 24 April: Walking the Tightrope

After a shocking start to the year, financial markets rebounded strongly and, for now, the rally continues. A number of factors explain the shift in sentiment. First, data from China, buoyed by stimulus and credit growth, has improved. Second, commodity prices have rebounded. Third, central banks have either eased or backed away from tightening. This has seen USD strength subside and signs of improvement in European credit markets.

The key question is to what extent these effects are transitory or long lasting:

  • With respect to China, a number of analysts argue the recent about-turn in economic numbers is “debt fuelled” and unsustainable. Last week George Soros commented: “There is an eerie resemblance to what’s happening in China to what’s happened here (US) leading up to the financial crisis in 2007-2008 and it is similarly fuelled by credit growth.” Others, instead, consider improved data to be indicative of a successful transition by the Chinese authorities from an investment to a consumption bias.
  • With respect to Commodities, oil last week rallied in spite of a failed agreement on a freeze in oil production. Thus price action is positive but it is harder to make a supportive fundamental argument. Any freeze would be at record output levels, inventories are still sky high and producer nations are playing weak hands; Saudi Arabia is selling off the crown jewels at the bottom of the cycle with the IPO of Aramco.
  • With respect to Monetary Policy, the ECB has focused on the credit channel to re-energise the Eurozone economy. Although early days, there are some signs in the lending data of an improvement. However, the marginal impact is small against the long running, structural issues. In the US, the FED has stepped back from its 4 hike forecast, weakening the USD, but the committee remain more optimistic than consensus and there are divisions emerging.

Although this week is light on data, there are FED and BOJ meetings, which may have a bearing on the market’s delicate equilibrium – particularly the path of the USD. More over the page.

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