Behind the further fall in long rates there are fears related to a coronavirus that does not disarm: in the last two weeks the new daily cases in the world are steadily above 200 thousand (they were on average 150 thousand in June): growth prospects are being eroded; and in the meantime excess savings in the world (households are reluctant to spend and businesses to invest) pushes down the cost of money.
Rates also affected it historic agreement at the European Council on the support measures of the Next Generation EU (official name of the Recovery Fund), which for the first time created a Eurobonds (although it is forbidden to call it that): i international capitals they have another reason to head towards the euro area.
A recent essay published by the NBER (Why is the euro punching below its weight”, by Ethan Ilzetzki, Carmen M. Reinhart and Kenneth S. Rogoff) argues that the fact that the euro had not really undermined the primacy of the dollar as a reserve currency also depended on theabsence of a safe assets in the single currency area. Absence that will be filled from the bonds that will be issued for the NGEU in industrial quantities (6% of EU GDP, 7% of Eurozone 2020 GDP).
The Accord has especially favorite Italy, which will not have to go into debt to finance the 200-odd billion euros that will arrive on our shores: the securities issued to NGEU are paid by the European Unionnot individual countries. Finally a debt mutualisation, albeit new!.
The European Agreement reduces sovereign risk for Italian securities. Certainly, in many years, Italy will have to contribute to the service of the single European debt, but we will worry about this when the time comes…
Meanwhile, it spread BTp-Bund has fallen below 150 and, barring political fibrillation, there is no reason for it to rise again.
For the real rates, the reading is complicated by two sharp changes in the dynamics of consumer prices in Germany (downhill) and in the Use (rising) – changes that brought the real rates of the two countries to the same same level (negative, by about 0,3%). Of course, with their respective GDPs falling sharply (about -8% for the two areas, according to IMF estimates), real rates should be much lower, but this could only be possible with high inflation (which will not happen).
The elimination of the dollar-euro differential in real long-term rates is one of the factors behind the fall of the dollar. But this fall has wider reasons behind it. One is the one mentioned above, i.e. a inflow of capital to the euro area, attracted by the solidity of the European institutions and by the improved recovery prospects (always with a view to "less worse"!).
Another, broader one explains why the American currency has weakened against the majority of currencies: there is a reason for demerit specific to the USA, a reason that goes beyond the merits of others and which regards the tarnishing of American political leadership.
For the yuan, the descent (that is to say, appreciation) towards the "6 point" against the dollar, overshadowed in the Lancet of last month, has become a reality. The Chinese currency could appreciate further, given the China-US growth differential; which would help ease growing tensions with America.
La American stock exchange is a whisker away from pre-crisis levels in February, when then-available forecasts called for the US economy to grow 2% in 2020. Now that +2% has become -8%, stock markets are roughly on the same level.
There are scholarly analyzes that explain this disconnection with the large share of the large technology companies in the market capitalization of the S&P 500. But the second quarter 2020 earnings for the companies that make up that index they fell sharply, which is consistent with the collapse of the GDP (about -30% at annualized rates). Nonetheless, the S&P500 continues to rise.
Sure, the relevant profits are future ones, in which equity investors seem to place touching trust…
True it is that discounted at lower rates they become ipso facto higher. But with rates close to zero for some time, the discount effect is now incorporated. Except that the horizon in which rates will remain so low or even more lengthens (the Bank of England is contemplating bringing them below zero).
However, also in other stock markets around the world there is a disconnect, albeit not as heated as in America, between prices and the economy. It is only to be hoped that the markets are right, but everything it smells like bubble. Even if it is true that the alternatives make little (bond and surroundings), the risk increases. The problem is not the return on capital, but the return of capital…
Their breaks new records, and it is difficult to make them compatible fly away of the safe haven with the soaring of the stock markets, which seem to suggest that there is no need to "take refuge".
