Even if the Central banks maintain an expansionary stance, there are signs that market rates are trying to rally from those historic nadirs of recent months. In some cases, such as for BTPs, this rise was pathological, the result of the hallucinating story of the Month. But in other cases – see Waist e T Bond – these evidence of an increase owes something to the fact that the world economy is showing – thanks to China and the USA – signs of stabilization and prices are staving off deflation.
The reason already mentioned last month regarding the upside tests also remains valid. In the Eurozone the structural primary surplus of public budgets is slightly decreasing and this reduction has lasted for three years. Naturally, the reduction is so timid that it does little to counteract the weakness of the economy, and the pressing calls for an expansionary fiscal policy in Europe are multiplying. Even if these invitations will not have much success, rates are feeling this trend towards higher deficits or smaller surpluses. The same is true for interest rates T Bond Usa: in America there is no need for pressing calls to widen the purse strings, as demonstrated by the public deficit of 1582 billion dollars (annualized and seasonally adjusted) in the 3rd quarter of 2019 (7,3% of GDP!).
The combination of long rates and inflation is reducing the spread between the real rates of T-bonds and Bunds, and historically the differential of real long-term rates it has been an important determinant of foreign exchange. This therefore plays against the dollar and in favor ofeuro. And, speaking of foreign exchange, the unpredictable American president has found another reason to raise tariffs. Since Argentina and Brazil have seen their currencies devalue (due to market events, not currency manipulation), Trump has decided that he will raise the duties on steel and aluminum coming from those two countries, to "punish" those devaluations. «OK Corral», in short, for tariffs around the world, pace of the WTO.
The Chinese currency changed little, and remained above the level of 7 against the dollar. But we must not forget that, from the beginning of the Great Recession to today (a dozen years have now passed) the yuan it appreciated by around 40% in terms of the main measure of price-competitiveness (the real effective exchange rate).
I stock markets, at least in America, are strong, and Wall Street has broken new records. However, there is a lot of “foam”. Both the Shiller indicator (the 10-year p/e ratio) and a long-term comparison between the trend of profits and that of the stock market indicate that the US quotes they are widely overrated. But what is the alternative for investors with such low rates and for a long time?
