At this present moment, something in the region of $13 Trillion dollars’ worth of
government bonds globally are on a negative yield. That means it’s costing investors money
to hold this huge, and still increasing amount of sovereign IOUs’. Yet many still seem
undeterred. Perhaps, its no wonder then that several learned experts, money managers and
pundits have issued dire warnings about this unsustainable situation. Indeed, each
month as the total of negative yielding debt increases so do the number of voices warning
The thing is; few of the world’s central banks appear to be paying much attention. The ECB
clearly isn’t and neither are the SNB or the BOJ. The RBA and the RBNZ have both been swift to reduce their benchmark rates too, but of course both those currencies still offer positive yields.
Over the past year or so the US Fed did try to counter the problem, but the FOMC has now
been pushed back on that policy and put under huge political pressure to reverse their
monetary tightening. However, yet again last week it was another economic number that
threw a spanner in the works on that political determination because the latest US jobs
numbers last Friday were actually pretty good.
Another in a long line of conflicting data releases that are surely making life difficult for
anyone trying to work out exactly where the US economy is headed and also causing huge
consternation amongst economists and expert pundits. I should imagine the Fed themselves
are equally confused for that matter too, especially by the lack of wage price pressure-
Certainly not something that anyone can easily explain either. Hardly surprising then that
the latest increase in the payrolls numbers also helped the dollar rebound a little more and
pushed the EURUSD back close to 1.12 again.
That’s quite a turnaround, especially given where the dollar started the new quarter just a
week or so ago. Perhaps the better pairing to look at in terms of dollar outperformance last
week was the GBPUSD which set a fresh, post January 3 rd low of 1.2481 on Friday.
However, both the GBPUSD and EURUSD are rebounding this morning. The GBPUSD has
lifted back above 1.2525 and the EURUSD has lifted a little too and continued to remain
above noted support levels at 1.12 and 1.1180.
Naturally, and as far as the GBPUSD is concerned, a lot of the weakness is not just dollar
related, but is Brexit based again as the threat of a ‘no deal’ exit is looming even larger now.
The one thing that has remained consistent with the GBP for several months has been the
fact that it has been a relatively easy sell off each and every rally. It looks set to continue in
that fashion until something shows up to shift those ‘no deal’ dynamics.
The Data/Event calendar has some important releases to take note of this week. The only
central bank policy decision is from the Bank of Canada on Wednesday, where no change in
the current 1.75% base rate is expected. As usual though it will be wise to watch out for any
accompanying statement from the BOC in terms of their immediate outlook forecast.
Earlier in the day on Wednesday there’s a plethora of UK numbers hitting the screens at
once at 9.30am, the highlights of which I have included in the list below. However, the main
event for most market participants will surely be; what if anything the Fed boss has to say
when he addresses the House at 3pm, for the first of two planned testimonies this week.
This might well be made even more interesting at 7pm when we see what, exactly the
entire FOMC had to say when they left rates on hold last month. Moreover, what if anything
those minutes might reveal in terms of how the Fed might act later this month is surely the
main focus for the markets this week.
Certainly the latest US unemployment report last Friday strengthened the hand of anyone
on the FOMC who’s not in the rate cutting camp. For whatever its worth I think the Fed is
right not to bow to political pressure because just now they are the only central bank out
there capable of diffusing this time bomb.
Perhaps Christine Lagarde will shift the dial if she does succeed Mario Draghi at the head of
the ECB? One thing is certain though; eventually this bond market will explode and the
bigger the explosion, the bigger the problem will be. I have talked this over with many
people in recent weeks and listened to some smart commentators on the subject too and
what emerges, with some of these bond yields where they currently are; is that it’s surely
never been cheaper to insure against a central bank default? If that is the case then
insurance, no matter how you construct it is surely worth a look?
Naturally that insurance has already showed up in the demand for gold over the past few
weeks, but maybe soon we might see something more direct unfold? All I do know is that I
am not paying any central to hold my money whilst eroding its value at the same time!
Important Economic Releases Due This Week
09/07- 6.45am Swiss June Unemployment Report
09/07- 11.00am US NFIB June Small Business Optimism Index
10/07- 2.30am China June CPI Inflation Report
10/07- 9.30am UK May GDP Estimate
10/07- 9.30am UK May Manufacturing and Industrial Production
10/07- 3.00pm Bank of Canada Monetary Policy Decision
(Benchmark rate expected to remain at 1.75%)
10/07- 3.00pm Fed Chair Powell Testifies before House Services Panel
10/07- 7.00pm Fed Releases Minutes from June 19 th FOMC Policy Meeting
11/07- 10.30am BOE Publishes Latest Financial Stability Report
11/07- 1.30pm US June CPI Inflation Report
11/07- 3.00pm Fed Chair Powell Testifies Before the Senate Banking Committee