Bad news from China, stocks jump... Good news from Germany, bund yields down. Not obviously logical?

ref: - “Germany enjoys first-quarter rebound", The Financial Times, International Section

There are plenty of bright investors knocking about… you wouldn't necessarily ascribe any great philosophical or intellectual depth to all of them, but fortunately, those attributes are not generally required to make a success of markets. What is a very basic prerequisite however is an ability to see beyond the headlines? On an almost daily basis, we see market moves that might seem illogical to those with no experience. They are easily enough explained most of the time, but a newly-arrived Martian keen to have a punt on the markets might find them... well, "counter-intuitive" shall we say?

Yesterday saw a couple of nice examples. Retail sales in China during April grew at their slowest monthly rate for 16 years, and the news came on top of an industrial output reading that was some way short of estimates. Our friendly alien might have assumed that this data would be pretty bad for share prices. In reality, China's CSI 300 Stock Index ended UP 2.25%. The rationale behind the move is that weak data such as this is likely to force the Beijing authorities to add more policy stimulus... and that, of course, WOULD be good for stock markets. Like we say, such thinking is hardly profound but it does illustrate the need to consider exactly what the data might mean further down the line rather than acting on an immediate, knee-jerk response.

It was a different kind of day in Germany, but it also contained a market move that might confuse a novice. Germany posted first-quarter GDP growth of +0.4%, and whilst the number wasn't entirely unexpected it did come as a relief. The theoretical definition of a recession is two consecutive quarters of economic contraction, and since Q4 2018's number of exactly flat followed a Q3 contraction you could say that a recession was avoided by the slimmest possible margin. This Q1 2019 growth figure of +0.4% serves to put recessionary fears to bed for a while, and as we ALL might have expected Germany's DAX stock index had a good day... though it must be said that much of the upside move for shares can be credited to President Trump's postponing of any decision on further tariffs on EU and Japanese auto exports to the US for six months.

The "surprise”, at least to that hypothetical novice, was that German Bund yields fell (which of course means that prices rose). Don't the text books say that all other things being equal, strong data and good economic news imply firmer monetary policy (or at least a reduction in pressure to ease)? That being so, in bond markets good news should encourage a rise in yields and a fall in bond prices, shouldn't it? And yet the yield on the German 10yr bund fell to MINUS 0.12%, the lowest for over 2 1/2 years.

Well, obviously we know that even though Germany's is the largest and most important economy in the Eurozone, it's the effect on monetary policy is less direct than elsewhere in the world -- the ECB has to consider a broader canvas than just Germany. But the overwhelming reason behind the fall in bund yields is that all other things are quite definitively NOT equal. Led by US Treasuries, all high-quality government bond markets are hugely in demand. The ratcheting up of the US / China trade conflict is sending investors in "risk-off" mode into the safe-haven of sovereign bonds. It's a flight-to-quality that illustrates just how worried they are about how badly an all-out trade war would affect the global economy. Plainly not everyone is as convinced as President Trump that the course that he has chosen is bound to make the Chinese accept the kind of deal he's after.

Talking of safe havens and flights-to-quality, we should probably also mention the increasingly worrying face-off between the US and Iran. It's bound to play a more significant role in haven-seeking if things continue on their present course. It's ironic that a President that preached (and to a degree acted upon) a policy of withdrawal from international involvement should be painting himself into a corner over Iran from which there may be no escape apart from some kind of escalation. Then again, with hindsight, we can say that after the President chose such a cast of Iran hawks as his advisors we shouldn't have been surprised.

Anyway, back to the German bund and it goes to show that however fixated we can all sometimes get with economic minutiae, sometimes there are things that carry a lot more weight than some economic data release... and what's going on in the world at the moment definitely qualifies...

Featured Posts
Recent Posts