MARKET OBSERVER – N° 122

The corrective phase that characterized the dynamics of the primary stock markets during the month of May, induced by investors’ concerns about future economic trends, was partially reversed in the last few weeks.

In fact, the US S&P 500 index has just touched its historical high, the European Eurostoxx 50 index has approached its recent annual high, while the Asian indices have registered a more modest recovery. At the same time the progression of the bond sectors continued without interruption, where the US ten-year dollar yield declined from 2.25% to 2.0% in one month and the yield of the German Bund increased from a negative yield of minus 0.15% to minus 0.30 %.

This tandem of positive bond performances continues on the part of the two sectors that make up the securities market, which according to traditional economic theory should have an antithetical dynamic with respect to economic expectations. It is no coincidence that for a decade a group of economists advocate an alternative approach, known under the moniker of “modern monetary theory”, which reinterprets the consolidated theses that for decades have theorized the dynamics of the markets with respect to the economy. In practice, after two decades of implementing massive monetary stimuli, the cost of money can no longer be considered zero or negative as an extraordinary measure of monetary policy, but instead must be considered normal. This normality derives from the fact that with the banking crisis of 2008 and its serious recessive consequences, the disinflationary phase induced by the globalization that started in the 90s, has become a structural deflation, of the Japanese type, destined to last for decades, of which only the US economy has so far managed to partially contain its expanse.

This thesis allows us to consider the constant bullish dynamics of the bonds as absolutely congruous and explainable, while the activity on the stock markets finds its justification in the excess liquidity created by the central banks. In practice, whenever equity investors begin to increase selling pressure on securities, the monetary authorities are quick to announce new credit stimulus plans. This is because a falling stock market has negative implications for the economic situation. Since the stock market decline at the end of 2018, the most active central bank in this regard has been the Chinese, PBOC, which after having drained 1.8 trillion RMB, the Chinese currency, from the system between November and last April, has reintroduced in a few weeks, 1.1 trillion RMB. Even the US FED, which in June maintained the base rate unchanged, appears ready to implement a reduction, perhaps even by the end of July.

The Governor of the ECB in one of his last public interventions, given the approaching end of his mandate, reiterated that the cost of Euro money will remain low for much longer. In practice, the marked strategic change implemented by the main global central banks since the beginning of the year has temporarily shifted the intensification of the economic slowdown already underway in Europe and China and the onset of a similar problem in the USA, buying time for a renewed positive trend in international stock markets, following the May correction. So, the current technical phase of the indices could continue during the summer, offering limited upside potential against a lower limit that should not violate the February lows. Quantifying, the levels of 2600/2650 points for the S&P 500 and 3150/3200 points for the EuroStoxx 50 index, should represent the lower level of the short-term fluctuation channel. Given the low risk profile of international investors, as witnessed by the recent rise in gold, the Swiss Franc and the Japanese Yen; stock market investments should be concentrated on large-cap and high dividend stocks.

Nicola Bravetti Data Source: Bloomberg