Tuesday, September 15, 2015

Fears are fading

Here's a quick update of some key charts I've been highlighting for the past three weeks or so. It's all about how terrified the market has been of slowing Chinese growth, a devalued yuan, and collapsing oil prices. Lots of fear, uncertainty and doubt out there, but so far nothing in the way of confirmation that the economic and financial fundamentals are deteriorating. It's hard for markets to stay extremely worried when nothing bad happens. What's changing on the margin is that fears appear to be slowly fading.

The Vix/10-yr ratio has plunged, but remains pretty high. Stocks are struggling to regain their former ground. We're not out of the woods yet, but we've made progress.

5-yr TIPS real yields continue to edge higher, suggesting that investors are regaining some confidence in the economy's ability to grow. Gold prices continue to drift lower, suggesting that investors are realizing that the fundamentals are not deteriorating. If the world were really unravelling, prices of TIPS and gold would be a lot higher.

2-year swap spreads both here and in the Eurozone continue to be relatively low, suggesting that the economic and financial market fundamentals are healthy. Healthy and liquid financial markets are an essential precondition if we are to weather the current storm of fears and doubts.

If swap spreads continue to be leading indicators of the direction of the economy, then spreads on high-yield debt are likely to tighten going forward. This is a very hopeful indicator suggesting we will survive the current bout of nerves.

In the absence of any outright unraveling of the economic and financial fundamentals, whether the FOMC raises rates or not at its meeting this week is almost irrelevant.

1 comment:

William said...

The financial markets in the US maybe "healthy". But the major problem is not in the financial markets as it was with subprime mortgages, mortgage insurance, and various derivatives with gigantic notional values.

The problem is in total global trade which has been slowing for three years, especially the past year when China slowed significantly. China's export prices have now fallen for 45 consecutive months putting pressure on all its competitors and trading partners. And along with oil prices is leading to lower and lower national inflation rates.

We are in the very early innings. Wait until the third quarter GDPs of major economies around the globe are announced.