The VP Blog
A blog about financial markets and the VP investing framework
The Argentine writer Jorge Luis Borges has a short a story about two lifelong rivals, villains to the core, who are finally captured by the authorities and sentenced to death for their misdemeanors. The officer in charge of the execution, a gambling man himself, challenges them to one final act of mutual defiance. He proposes they should have their throats slit, and then race to see who can get the farthest.
With the US stock market continuing to grind out new highs, some commentators have cast doubt on the usefulness of so-called macroeconomic surprise indices as a tool for predicting the market. To add weight to the argument, these commentators even include the proprietary holders and creators of the indices, Citigroup.
We would certainly agree that looking at any one tool will always give false signals and lead to poor predictions. The ongoing divergence between a negative macroeconomic surprise index and a rising 3 month change in the S&P 500 is not a good short term sign for the stock market.
The Euro is making headlines again, this time not due to its possible imminent disappearance as a currency but rather as a result of what many regard as its undue strength. Last week’s press briefing comments by ECB President Mario Draghi to the effect that “The exchange rate is not a policy target but it is important for growth and price stability,” had put markets on their guard that the central bank was taking note of recent currency movements, and especially those vis-à-vis the Japanese yen.
Markets have been jittery in recent days, especially around fears that the simmering embers of the Euro Area debt crisis might be about to reignite. Bond yields in both Spain and Italy have risen this week, while concerns continue to hover about whether a calm...
US coincident activity index turns up in line with leading indicators, more upside ahead
European economies showed further signs of stabilization in January with flash PMIs registering continued strengthening on most fronts (this week will see a number of actual PMI readings). The only noteworthy exception was France where conditions deteriorated further, with the composite reading falling to 42.6 (from 44.7 in December) and hence showing a sharp contraction. At the other end of the scale was Germany, where the composite showed 53.6 (up from 50.3 in December), an evidently positive surge in activity.
As foreseen in recent updates on Spain, the market for SGBs remains calm and spreads across the maturity horizon are tightening. Last week Spanish ten year yields fell below the 5% mark for the first time since March last year, while two year yields are now hugging the 2% threshold. During the week the Spanish debt agency sold 5.8 billion euros worth of bonds at yields which were significantly down over recent levels across all maturities.
With the Fed now targeting unemployment, the market is now understandably even more focused on US labour market releases.
The OECD diffusion index leads our global export index by about 6-9 months, and even if it is turning down into mid-2013, it suggests that better times are ahead for global export activity (upper chart). Indeed, we are now seeing clear signs of a pick-up in global...