Bull and bear: Bonds prices in sharp falls: is this a dry rehearsal for the crash to come? - The Share Centre Blog

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Michael Baxter

Bull and bear: Bonds prices in sharp falls: is this a dry rehearsal for the crash to come?

Written by: Michael Baxter on June 3rd 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories include:  Bonds prices in sharp falls: is this a dry rehearsal for the crash to come? Google app platform set to take on Apple: is this a problem for Apple, or a sign of problems at Google?  China is back, no it isn’t. Now Robert Kennedy Jr turns against BP

Bonds prices in sharp falls: is this a dry rehearsal for the crash to come?

When things are normal, interest rates are high and bond prices are lower, a higher proportion of company profits is reinvested, and markets put higher prices on more risky assets. Critics of QE and government stimulus programmes say: woe is us, what will happen when things return to normal, and interest rates rise? The other side says: but interest rates will only rise when the economic outlook improves, so why fear a switch from abnormal conditions in which growth is continuing to be disappointing, to one in which growth returns to normal?

In short, one side says that the time to panic is when interest rates rise; the other side says interest rates will only rise when the time to panic is over.

Over the last few days, or indeed over the last few weeks, markets have been pushing bond prices upwards. When May began, the yield on US ten year government bonds was around 1.6 per cent, around the lowest level for 2013 so far. They finished May at 2.13 per cent, a 14 month high. The yields on Japanese ten year government bonds have risen sharply too. Yields on the UK equivalent are up as well, but have not risen quite so fast as in the US.

The Fed is dropping ever stronger hints that its QE programme is running to the end of its life. In the UK there is a consensus that once Mark Carney has settled in at the Bank of England, more QE will be unleashed. This difference in central bank speak may explain the slightly divergent performance of UK and US bonds.

Bear:   The BIS, which is the closest we have to a world central bank, is worried. In its latest quarterly review  it said that the markets are living under the spell of quantitative easing. It warned that recent QE coming from Japan, and moves in the euro area, where interest rates have been cut to half a per cent have “boosted market sentiment and lifted the main equity indices to new highs.”

The ‘Wall Street Journal’ quoted the BIS’s Stephen Cecchetti as saying: “Yields will go up, as the economic recovery takes hold, but the ride to normality will almost surely be bumpy, with yields going through both calm and volatile periods, as markets price in sometimes conflicting news.” The paper paraphrased him as describing recent rises in bond yields as a: “Taste of things to come.”

Mystery:          One mystery remains. To what extent have rises in share prices been down to QE pushing up on asset prices, and to what extent has their strength been down to improving sentiment about the economic outlook?

Are bond prices falling, as markets decide they will accept lower risk premium, and are thus pouring investment into risky assets, or will we see both bond prices and equities fall in tandem once QE finally comes to an end?

Google app platform set to take on Apple: is this a problem for Apple, or a sign of problems at Google?

Google seems to be the tech of the moment. Whether Apple is at an in-between stage, preparing for the next wave of disruptive technology, or whether it has simply run out of creative juices after the loss of Steve Jobs, is yet to be seen. Markets and the consensus do not seem to fully appreciate that we are at something of technology hiatus at the moment. We will be entering a new stage in the technology story soon. Apple may or may not be able to fully exploit this new opportunity, but to write off Apple, as so many are doing because it is not growing as fast at the moment during this interim stage, does seem a tad short-sighted.

Now it has emerged that the Google Android family of devices is close, very close, to overtaking Apple as the number one app platform.

Last month Apple announced that so far 50 billion apps have been downloaded for its iPhone and iPad. Google said 48 billion have been downloaded for the Android.

More to the point, Apple is targeting 2 billion downloads a month, while Google is talking about 2.5 billion downloads. So that would suggest it won’t be long before the Android platform overtakes the Apple one.

It has led to even more hype and talk that Google is set to become, as it were, the next Apple.

Google is indeed a very interesting company, but much of the recent analysis may miss the point. In fact one wonders how many of these analysts have used an iPhone, because they certainly don’t seem to get the crucial point. Apple has always been about focusing on quality over quantity. Google apps may be more numerous, but are they better? Do they get used as much as Apple apps? The answer to that is not so clear.

China is back, no it isn’t

Wait and see what the PMIs say. That’s what many analysts said last week. The first few days of every month see the normal deluge of Purchasing Managers’ Indices (PMIs). These are possibly the most reliable forward indicators out there, and may help to tell us whether some of the good news we have seen of late will continue. They may help to shed light on whether recent market strength has been down to good fundamentals, or just hope over reason.

Well, today and over the weekend, we saw PMIs covering China’s manufacturing. There were two of them: an official version from the Beijing-based National Bureau of Statistics and Federation of Logistics, and there was the HSBC/Markit version.

Over the weekend, the markets were cheering. The official PMI was out on Saturday and the index rose to 50.8, from 50.6 last month – 50 being seen as the crucial no-change level. So that was good, and many interpreted the data as suggesting China was at last on the way back up again.

But this morning the HSBC/Markit measure, which puts more weight on smaller companies, was out. This index fell to 49.2.

Markets were more pleased than disappointed, as we had already seen a flash version of the Markit/HSBC report, so to an extent they had priced in the below 50 reading.

In other words the findings from the two reports are ambiguous, but since we already knew the HSBC/Markit report was going to be negative, the markets came out bullish.

Meanwhile, famous contrarian investor Marc Faber reckons the official data on China’s growth is wrong – very wrong. China’s official data on exports to Singapore, Taiwan, Hong Kong, and South Korea does not agree with the import figures from these countries. Mr Faber reckons that once this is taken into account (and assuming the Chinese data is not as reliable), China’s economy is really growing at around 4 per cent a year, not 7.5 per cent.

He probably exaggerates the argument, but nonetheless, it is quite possible that the Chinese economy is not doing as well as is generally thought.

Now Robert Kennedy Jr turns against BP

BP is being bullied, right? BP is a victim of a kind of US anti-foreign-companies bandwagon. It is paying out compensation to companies that were not in any way affected by the Gulf of Mexico oil spill, right?

This view may be right. The company may be a victim of a witch hunt.

But Robert Kennedy Jr, who is a nephew of the late president of that famous name, has laid into the oil company.

On the topic of whether BP is being picked on he was quoted in the ‘Telegraph’ as saying: “They are being picked on as an oil company that wrecked our Gulf and lied about it…I don’t care if it’s a British company or Exxon. I would rather sue Exxon than BP, because I think Exxon is a worse company. But Exxon didn’t do the Gulf spill.”

He called for a “high enough level of punitive damages that it gives an incentive to their industry to spend as much money on protecting the safety of the public and the environment as they do on their tax lawyers, who are trying to reduce their tax liabilities.”

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: BIS bonds QE and equities, Bonds prices, BP Robert Kennedy, China GDP accuracy of data, China recovery PMIs, Googe versus Apple apps

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