This week we got to see more amazing stuff in the European bond markets. The ECB started its massive QE program on Monday, and that didn’t stay unnoticed. Several research items popped up showing that, given the constraints the ECB has imposed on the bond buying program, getting to the desirable amount of EUR 60 billion a month requires a serious effort. It also means that, when the ECB’s monthly buying spree is taken out of the equation, the total stock of bonds left for other investors will decrease.
New all-time low in yields today in:
Germany (23 bps)
Finland
Netherlands
Austria
Belgium
France
Ireland
Italy
Spain https://t.co/dU78NNhHzQ
—
Charlie Bilello, CMT (@MktOutperform) March 10, 2015
The possible scarcity (a term also explicitly used in the ECB press release concerning the QE program) of eligible bonds led to another massive downward move in bond yields, with many European countries hitting new lows.
Scarcity! The amount of Eurozone #debt 'available' for the private sector after #ECB buying will shrink considerably. https://t.co/Ub9b7syImp
—
jeroen blokland (@jsblokland) March 11, 2015
The move in the German 30-year bond yield was perhaps most fascinating. In a matter of days the 30-year yield came down almost 40 basis points to below 0.70{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}. I don’t think Draghi anticipated such yield levels at all, let alone the speed at which these levels were hit. And it’s still a long time to September 2016.
just AMAZING! The German 30-year bond yield has come almost 40 bps since Monday only. #ECB #QE https://t.co/pH6MJMGVQR
—
jeroen blokland (@jsblokland) March 12, 2015
Bonds yields were not the only thing that hit new lows this week. The euro fell of the cliff against the US dollar and briefly traded below the 1.05 threshold. This is the lowest level since 2002! Some nice extrapolation tweets floated around, suggesting that at this pace the euro could hit zero before summer. That said; looking at interest rate differentials between the US and the Eurozone, the euro might have devalued a little bit too much for now.
Has the #euro overshot? Short-term interest rates suggest 'yes'. #EURUSD https://t.co/omC3S42aji
—
jeroen blokland (@jsblokland) March 12, 2015
Another graph that suggests the same is the one below, which compares the current pace of euro depreciation and the depreciation of the yen in the run up to the BoJ announcement on QE.
If the #euro is anything like the #yen this could be it for now, this Citi graph suggests. Via @Schuldensuehner https://t.co/4Fm9UX7faW
—
jeroen blokland (@jsblokland) March 12, 2015
Meanwhile, things don’t look all that pretty in the US. Especially the retail sales have been under pressure in recent months. The cold weather definitely has something to do with that, but the underlying trend is weakening as well. The Atlanta Fed now expects US GDP growth to come in at 0.6{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} for Q1. Yes, that is on an annualized basis.
US real retail sales are coming down sharply, even with negative headline inflation. Eurozone much better than US. https://t.co/80qqIt29jl
—
jeroen blokland (@jsblokland) March 12, 2015
The massive move in the trade-weighted US dollar is also starting hit companies. EPS growth and dollar strength do not get along very well.
Dollar stress! The trend in the trade weighted USD doesn't bode well for earnings expectations. via @Not_Jim_Cramer https://t.co/4O12ngupcK
—
jeroen blokland (@jsblokland) March 11, 2015
So, could the strong dollar be reason for the Fed not to raise rates? At this pace Yellen could use to the dollar as an argument to take it easy. But, far more important is the development of wages. Wage growth is still muted. On the other hand job creation remains remarkable strong. This should, under normal circumstance ultimately lead to higher wages.
No wage growth, no rate hike? #Fed https://t.co/BNwm7uv4eN
—
jeroen blokland (@jsblokland) March 12, 2015
There was a new high this week as well. After the NASDAQ last week, the Nikkei was next. The index surpassed 19000, the highest level since April 2000. The correlation between record low bond yields and record high stock indices is a strong as ever.
Catching up! The #Nikkei is outperforming recently, following the further weakening of the #yen with some delay. https://t.co/YsEvJXiB5G
—
jeroen blokland (@jsblokland) March 13, 2015
This week also marked the sixth birthday of the stock market rally. Six years in which central banks around the world have dominated both equity and bond markets. This week I wrote a blog post on the six years of central bank dominance. You can read it here.
Blog: Six years of Central Bank Dominance in Six Charts.
jeroenbloklandblog.com/2015/03/10/six… https://t.co/MYlibba1Ek
—
jeroen blokland (@jsblokland) March 10, 2015
The six-year rally was also very useful input for another very scary graph. Historically, a six-year equity market rally occurred two times before. One in 1929 and the other in 1999. We all know what happened next. But, before you get too nervous, this chart is also another great example of data mining. If you increase or shorten the rally period with just a few months things don’t look that dangerous anymore.
Here's a chart to get you nervous. Equity market rally matches those in the years up to 1929 & 1999. via @KarelMercx https://t.co/VAcJHRdT9U
—
jeroen blokland (@jsblokland) March 11, 2015
Thanks for reading the Week End Blog. Enjoy your weekend!
Filed under: FINANCIAL MARKETS, MACRO Tagged: all-time high, bond yields, ECB, equity market rally, Euro, Fed, Nikkei, QE, wages, yen 
SOURCE: Jeroen Blokland Financial Markets Blog – Read entire story here.
