Am I taking the ECB seriously enough? Could Draghi’s comments yesterday mean that a major SMP operation is in the offing and that it will create a rally is risk assets? I think the answers are yes, and no. The SMP was in operation for much of 2011 and did not on its own allow risk assets to rally. Apart from anything else, the Greek situation was able to dominate. SMP purchases are about closing off a tail risk — that of a self-fulfilling spiral upwards in yields — not about turning the situation around. Further, I do not see anything in Draghi’s remarks to suggest more aggressive action than we have seen in the past, although his speech does of course confirm that the SMP option has not been closed off, which is why the markets were able to rally yesterday. If you read the whole speech (http://bit.ly/LRygc1) it is mostly a laying-out of reasons to be optimistic about the Eurozone, including the ECB’s capacity to take action if it feels such action is necessary.
Looking Inside the Equity Market
The sectors of the SPX look a lot more bearish than the index itself. Consumer discretionary is a long way down since may vs. consumer staples and doesn’t show much sign of a rally since the Greek election. Indeed, of the risk-on sectors, only energy is up strongly on a relative basis since the start of June. The recent rally has been driven by energy, healthcare and, to a lesser extent, financials, although the latter have sold off and stayed down in the past few days. The energy rally can probably be put down to the increase in the oil price in the past two months; a rally in healthcare, a defensive sector, can hardly be considered a good sign for the economy.
Turning to global equities, SPX as usual looks like the strongest market. Others rallied after the Greek election and then either made a range or rolled over. All of this suggests to me that we have had a post-Greece relief rally but that the markets will not rise further without some deeper improvement.
China, So Dark
I am broadly of the view that if China loosens policy then local governments will return to infrastructure spending and the selling of land for development, and hence China’s investment-driven growth will accelerate. Policy may have been loosened — in terms of reserve requirements, interest rates and administrative restrictions — but it is not clear by how much. Bloomberg has a story today that talks about a new CNY 830 bn infrastructure programme announced by the city of Changsha; this coincides with an announcement by the State Council of a plan to promote development in China’s central provinces. Does this mean another big infrastructure stimulus is on its way? I hate anecdotal evidence.
Perspective on German Comments
Germany’s vice premier may have sounded negative on Greece, but Merkel and Schauble will decide German policy and Schauble has said that no position will be taken on Greece until the Troika reports in September. What, then, do the recent comments on Greece by other political figures mean? They mean that Greece is becoming increasingly unpopular within Merkel’s coalition, and that will limit her freedom of action. Another bailout could probably be pushed through the Bundestag with opposition support, but it is generally not helpful to a politician to rely on his opponents for support. Merkel is likely to try to avoid acting until absolutely necessary. That that has already appeared to be true — the latest (minimal) agreement came only after other European leaders put their collective foot down — suggests that Merkel is already well aware of these political constraints. What has changed with these public comments is that the rest of us have become more aware of them.