Market Commentary -
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Weekly Roundup 28 July 2011 2
Chart of the Week:What are the interest rate markets telling us?
As we head to the end of the month we cannot help but be a little concerned about the wayfixed income markets and curves are trading.U.S. 2’s versus 5’s curve
Source: Aspen Graphics / Bloomberg 27 July 2011.
While the World holds it breath and waits for a resolution to the “U.S. debt crisis” the 2’s versus 5’shas resumed its bull flattening dynamic. Amazingly it sits today (27th July) at 108 basis points which isexactly the same level as we were at on 28
July 2010 having flattened from a level of 161 basispoints in January 2010. This time around we have flattened from 156 basis points in February 2011.
Further flattening then continued in August, 2010 as the Equity market “swooned” and the S&P fellfrom 1,129 on 04 August to 1,040 (Down 8%) just 3 weeks later.
Of course we know that this slide was arrested by the increasing guidance that QE2 was on the way.That is just not going to happen this time in our view. We are still 16% above that August high and afull 26% above the low that was posted in August last year at 1,040.
By the time we reached that low in the S&P this curve had flattened to 85 basis points. That iscertainly more than we would have expected to see this time, but not by any means impossible.
However, if support around 104-107 basis points was to give way we would be concerned about anacceleration to the downside (Albeit we do not expect a move as far as we saw in 2010 – to 70 b.p.’s)
One might almost be inclined to believe that this curve was now showing more concerns abouteconomic slowdown/recession than debt concerns. (As in Europe, debt concerns would more likelysee the curve bear flatten). However when this flattening began in Feb this year, 5 year yields were at2.42% and are now at 1.53% and just 18 basis points of the years low.
So what we actually have is a dynamic where:
Q.E. has ended and that increased stimulus is no longer “feeding” through to the economyand asset markets.
The chance of a U.S. Govt. debt downgrade has risen sharply. While in the near term thismay well be a non-issue (The U.S. debt remains firmly investment grade) it is a “shot acrossthe bow” with regard to fiscal responsibility. It is a warning that we have no choice but to cutback on the policies of recent years and start taking the fiscal imbalance seriously.
Crude Oil remains firmly wedged at the moment close to $100
Growth has been slower than expected in H1 and the unemployment picture has shown somedanger of deteriorating again.
In effect the “patient” (U.S.A) has been continually on life support for the past 2 ½+ years and wehave run out of money to pay the electricity bills.