Risk-on vs Risk Rally
Since November I have claimed that we were in a risk-on
situation in the markets and at the turn of the year I believed that it could
turn into a market rally. The distinction is crucial. A risk-on situation
prevails when the markets are getting less fearful and the asset prices adjust
accordingly. A risk-on situation may turn into a rally if the price adjustment
leads to increasing volumes and that in turn leads to added asset price
momentum. It certainly looks like we are there now. Last week’s raft of Market
Strategists turning positive is just another proof that consensus is now
following the markets (and not the other way round!).
Observing a risk rally is quite obvious and does not require
a lot of rocket science. Defining the beginning of a risk-on situation is a bit
more complicated, as the signs are often weak at the beginning. Looking back,
we believe that the risk-on situation began in late September and accelerated
in late November (even if the stock markets actually fell a bit) and again in
December. The market rally only kicked in later.
At Origo we devote considerable energy to time these turning
points. Now, in the fifth month of the risk-on situation, we are becoming a bit
concerned. The market optimism may still developing further. But there are some
not-so-healthy factors in the European economy, including credit. We still need
decisive action to recapitalise banks.
The good news is that when a risk-off situation begins, it
is usually clearly visible in advance and the signs are unmistakable once it
hits the markets. If you have forgotten what it feels like, think back to 2
August.
A Greek default is increasingly likely
The Greek drama continues to develop, but now with a quite
different twist. Over the weekend, Euro-group Chairman Jean-Claude Juncker
piled the pressure on the Greek government to be serious about implementing
reform as a condition for the disbursement of further help. Some days ago I
sent a couple of links to documents that amply demonstrate the point: The Greek
government faces a serious job in reforming the public sector and that goes way
beyond just reducing costs. OECD has pointed out that the public administration
is largely dysfunctional, that there is no follow-up on policies and their
effects, that public collection and use of data is disastrous. I quote from
OECD:
“For now, it is not clear how existing and new entities of
the Centre of Government will work together in order to secure the leadership
needed for reform, including the necessary strategic vision, accountability,
strategic planning, policy coherence and collective commitment, and
communication. Fundamentally, there is no obvious ownership of the reform
agenda either with specific entities at the Centre of Government, or shared by
these entities. The capacity to
co-ordinate with key ministries is also weak.” (OECD’s emphasis)
And so on. Again it appears that the conservative Nea
Demokratia party at the same time tries to present themselves as defenders of
the country and an even stronger defender of vested interests that are dead
against any kind of meaningful reform.
Meanwhile, the negotiations with the private bondholders
appear to have taken a back seat, at least in the newspaper headline space. But
we certainly are on the final straight: On Wednesday the EU Council meets, and
the Greek negotiations are on the agenda. On 13 February a formal offer for the
“voluntary” debt swap must be presented in order for the Greece’s large coupon
payment on 20 March to actually be paid.
But at this moment, any losses ought to be fully discounted
by the markets. I guess it is only the distribution of the losses that remains
to be seen.
US Jobs report
The US labour market data released on Friday gave the stock
markets a good boost. The headline unemployment number fell from 8.3 to 8.1 per
cent in January. That number is one of the most suspicious numbers in the
entire cycle of US monthly data releases. Since Reagan’s days, this number is
an estimation, based on panel data, and not on any kind of national records. In
particular the number of job seekers is dodgy and fluctuates significantly. As
a result the unemployment rate can fall if unemployed persons drop out of the
labour force. In the US definition you can fall out of the job-seeking category
if a job offered is turned down, eg. because of a too low pay.
There is more substance in the data for actual jobs
creation. And those data showed that job creation is getting broader and more
dispersed. Anyway, it is a lagging indicator. US data have exceeded expectations
since October of last year.
No comments:
Post a Comment