Economy

(New York)

The US and most of the developed world is seeing very little inflation. However, that is not stopping investors from jumping into inflation-linked US bonds, or TIPS. An auction of such securities saw great activity, and primary dealers walked away with their lowest share of the auction in more than a year, as asset managers and foreign central banks snapped up the bonds. The increased demand for TIPS shows that growth is being priced back into the US market, and thus can be taken as a sign of bullishness on the economy. Here is an overview of the situation from a Pimco economic adviser, who said “There are signs of wage inflation, we have seen the end of the big bull run in the dollar, and energy prices have renormalised, which will feed through into headline inflation later this year … Tips offer relatively cheap insurance against upside inflation risks”.


FINSUM: We do know a lot about TIPS, but we think it is an odd time to be buying them given the lack of inflation and better ways to express bullishness. This is an extremely defensive way of expressing bullishness.

Source: Financial Times

(Frankfurt)

Markets are very nervous today as they wait to hear on how the ECB will react to the UK’s Brexit vote and the resulting plunge in markets and yields across Europe. The ECB is in a tough position, as the drop in yields has made many bonds, such as over half of all German government bunds, ineligible for their QE buying programme. Other countries, like Austria and Netherlands, have seen similar falls, though Germany is the largest single component of the ECB’s buying programme. According to a commentator in the piece, there is no easy fix to the situation, so all eyes are on the ECB to see what it is going to do. One option would be to scrap the mandate that buying needs to be in proportion to the size of a member state’s economy, but that would be highly controversial, as it would shift buying to the most indebted countries and become “Banca d’Italia QE”.


FINSUM: This is a big decision with a lot of consequence to Europe and markets. A big new push into stimulus would really give things a boost.

Source: Financial Times

(Houston)

Most of the market’s focus has been on stocks, government bonds, and Europe, which has taken oil out of the limelight. Oil did seem to grab headlines because it appeared a barometer for the health of the economy, which may no longer be the case. However, many are still highly invested in it, and the fact of the matter is, oil’s outlook is weak. Investors are growing increasingly worried about a glut of gasoline that will drag down refinery demand for crude oil, and thus send prices lower. Many now think a rise in production, coupled with the glut of gasoline, will send prices spiraling back to $40 per barrel.


FINSUM: We think oil is headed downward. Shale is more competitive, the world’s economy looks weak, and there is a glut of gasoline. In our view there is little to be bullish about.

Source: Wall Street Journal

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