The rally in global equity markets isn’t reflecting risks to economic growth from the European debt crisis and U.S. spending cuts, said Nouriel Roubini, the New York University professor famous for predicting the 2008 crisis.
Global stocks have gained more than $2 trillion since the start of 2013 as central banks move to stimulate economic growth. Risks including a deeper recession in Europe triggered by austerity measures and political turmoil as well as slower U.S. economic growth may return in the second half of the year, said Roubini, chairman of Roubini Global Economics LLC.
“Those risks are currently somehow under-priced by the market,” he said today in an interview. “They may be contained in the first half of the year, but they may re-emerge.”
BofA Merrill Lynch technical strategist MacNeil Curry is out with a pretty pessimistic note to begin the week.
Curry’s message to the bank’s clients is that a coming bounce in the stock market following the first real sell-off of the year will probably prove to be only temporary. He notes that other risky assets, like European stocks and peripheral government debt, have already taken a turn down.
Below are the key paragraphs from Curry’s note:
While the evidence warns of the potential for new cycle highs in US risk, don’t lose sight of the bigger picture.
While US equities could see a push to new cycle highs on the back a renewed resurgence in risk, the larger body of evidence says that this is a VERY late stage advance for ESH3/S&P500. Gasoline prices and sentiment are particularly worthy of note as both are at levels that have repeatedly coincided with medium term highs. Historically, RBOB moves above $3.50 have resulted in S&P500 tops, while sentiment (using DSI as a proxy) has reached relative extremes from which the market has often turned lower.
Commodities & European risk markets have already turned trend. Stay bearish. Bunds to benefit. Waiting for USDSEK
While US equities could see new highs, they are the exception, not the rule in the risk world. Indeed, both commodity markets (specifically Oil and Copper) and European risk markets (peripheral debt and Euro Stoxx) have already turned medium term bearish. Going forward, bounces in these assets should be seen as selling opportunities. Meanwhile Bunds will continue to outperform as yields remain on track to test and likely break their 2012 lows of 1.256%/1.123%. Finally, we continue to watch $/SEK as a rebound in risk sentiment should take the pair down into the 6.4086/6.3558 support zone. This would be our opportunity to go long for 6.8156 and potentially beyond.
Nearly half of Italy may already be on board.
Beppe Grillo, the leader of Italy’s nascent Five-Star Movement catapulted into power by last week’s Italian elections, is causing a bit of a stir this weekend.
Saturday, Grillo told German weekly news magazine Focus that given the dire straits Italy’s economy is in, if things didn’t change, Italians would want to leave the euro.
Then, in an interview Sunday with Bild — Germany’s biggest newspaper — Grillo said he supports a referendum on euro membership.
Referenda on euro membership in the euro area periphery, which is suffering the pain of record levels of youth unemployment and, in Italy’s case, a deepening recession, tend to spook investors.
Former high-level Greek diplomat Leonidas Chrysanthopoulos told the UK’sNew Statesman last week that discussions had taken place between senior Greek politicians and the armed forces on the military’s response to what Chrysanthopoulos described as an “explosion of social unrest” expected to occur “quite soon.”
Chrysanthopoulos said that in the coming months, “There will be further increases in armed actions. There will be bloody demonstrations.”
Without giving details, he said, “There are contacts by certain politicians with elements in the armed forces to guarantee that in the event of major social unrest, the army will not intervene.”
The awesome chart below was created by Doug Short, reflecting that a “ton of cash has disappeared in investors pockets this past month!”
CLICK ON CHART TO ENLARGE
China Tumbles On Real-Estate Inflation Curbs: Biggest Property Index Drop Since 2008; Japan Downgraded On Abenomics
As we have been warning for nearly a year, the biggest threat facing China has been the fact that contrary to solemn promises, the problem of persistent, strong and very much relentless real-estate inflation has not only not been tamed but has been first and foremost on the minds of both the PBOC and the local government. After all with the entire “developed” world flooding the market every single day with countless billions in new cheap, hot money, it was inevitable that much of it would end up in the mainland Chinese real estate market. And since both the central bank and the politburo are well aware that the path from property inflation to broad price hikes, including the all critical to social stability pork and other food, is very short, it was inevitable that the issue of inflation would have to be dealt with eventually. Tonight is that “eventually”, when following news from two days ago that yet another Chinese PMI indicator missed, this time the Services data which slid from 56.2 to 54.5, the government announced its most aggressive round of property curbs yet. The immediate result was that the Shanghai Stock Exchange Property Index slumped by a whopping 9.3%, the steepest drop since June 2008, and pushing it down to -11% for the year. The weakness also spread to the broader market, with the Composite closing down 3.65% the biggest drop in months, and now just barely positive, at +0.2%, year to date. We expect all 2013 gains to be promptly wiped out when tonight’s risk off session resumes in earnest.
Elsewhere overnight, the Bank of Japan’s new head Kuroda did what the BOJ has been doing best (and only) for the past six months – talk, talk and talk some more, this time in his parliamentary confirmation hearing. He repeated the usual tripe that only a central banker can spew with impunity. Select speech headlines from Bloomberg:
- KURODA: ENDING DEFLATION BIGGEST TASK FOR JAPAN ECONOMY
- KURODA: BOJ’S EFFORTS HAVE FAILED TO BEAT DEFLATION
- KURODA SAYS BOJ HASN’T BOUGHT ENOUGH ASSETS TO END DEFLATION
- KURODA SAYS NOT MUCH ROOM TO CUT INTEREST RATES
- KURODA SAYS BOJ EASING ISN’T AIMED AT WEAKENING THE YEN
- KURODA SAYS CAN’T DENY MONETARY POLICY AFFECTS CURRENCY MARKET
- KURODA SAYS ACHIEVING INFLATION TARGET IS BOJ’S JOB