Markets revving up for race towards year-end
THE British Grand Prix this weekend has me thinking in motor racing analogies as the financial markets apply the brakes to one of the speediest equity rallies of this generation. As the end of the second quarter approaches, the chicane of thin summertime volumes and quiet corporate activity means we’re unlikely to accelerate into the black until September for the push towards the home straight.
That said, it’s not just a “racing line” that’s slowing the equities pace: investors are looking at the global engine and wonder if it can continue to fire on all cylinders now that around $25 trillion worth of stimulus and bank rescue fuel has been pumped in.
A quick glance at the gauges on the dashboard is also reason enough to apply the brakes: government bond yields are rising steadily, either as an act of investor “vigilantism” in protest at state borrowing binges or as evidence that investors are selling the debt and buying riskier assets. Whatever the reason, the higher borrowing costs that will soon follow might choke-off any hope of a “v-shaped” economic recovery. And we can’t talk about engines without mentioning oil. Crude prices have smoothly overtaken $70 and now trade about $15 higher than their 200-day average, suggesting the trajectory still favours further advances.
Again, the reasons for the rise are being debated: is oil rising because of the weak US dollar or is it rising because the global demand story is taking a permanent turn for the bullish? Evidence supports both views, with the latter buttressed by the first revision upward in demand by the International Energy Agency in nearly two years.
It’s a tough track to race on, and the fuel in the engine is not what it used to be: securitisation, hedge funds, private equity firms and other members of the “shadow” banking system used to create billions in credit and were effectively the “rocket fuel” to the global economic engine. But even with our foot on the accelerator, we probably won’t reach the speeds we used to top-out at a few years ago.