Some good reports this week with much discussion on the macro significance of the data and instrument movements. Breakouts by rates and US$ index, breakdown defensive utilities. Fitzpatrick commenting that the inflation benign tailwinds from lower oil prices is likely behind us setting up for a cyclical rally attempt vs defensive issues.
As always monetary policy has been key in thwarting the recent pull back. The ECB has set market expectations for an expansion of its asset purchases and or lower interest rates at their December meeting. Euro policy makers late to the monetary magic game appear determined to play catch up to reflate the euro system and so create inflation by expansion of the ms and via lowering the euro’s value. The Swiss team’s scenario of an h1 2016 market new highs looks in the play thanks to this monetary magic.
Here the reports:
Here Fitzpatrick with his usual excellent report. And what he doesn’t mention is what occurred, each time rates were too low for too long, to the yellow metal. Gold soared upward in value whenever real rates are significantly negative. 75 to 79, 02 to 04 but not yet the recent period of real negative interest rates.
And here GS with their usual run through
Although the cyclical indexes have the edge here the low growth, new normal is certainly still in play here. And on this basis some of the property reits do look very beaten up here. Champion Reit in HK showing about a 50% discount to to Nav and even high quality reits with low debt have seen their value collapse as rates rise at the long end.
For my own mind from a macro comment feeding in to sector allocations whilst the cyclical story has some room to run here, post a short term correction, the long end of the yield curve may be a buy soon as the chances for an inverted yield curve looks very likely to me at some point in the next few years or so. As soon as the long end plateaus this would have meaningful implications for reits once again, to the upside. In addition negative implications for the banks and other financial institutions who borrow at the short end and lend at the long end. Its usually is negative for credit expansion. A long way of saying its worth keeping an eye on the reits.
Key an eye on all ten year debt charts. The US consumer is unlikely to sustain higher mortgage costs, currently at 4 month high rates, due to being based on the UST, roughly 160 basis points plus UST. Here the SGST:
All the best
Rich