A new report from Pimco, the world’s largest bond fund manager, makes it clear they share the blog’s worries about the increasingly negative impact of western central bank policy:
“Central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth. Where their monetary repression has succeeded, however, is in forcing investors to take increasing amounts of risk, but for lower yields and more volatile returns.
“We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors.”
Or as they put it in their regular monthly report earlier this month: “The Fed’s QE plan assumes higher asset prices will reinvigorate growth. It doesn’t seem to be working.”
Last week was a perfect illustration of the way central bank liquidity means markets are no longer fulfilling their key role of price discovery:
• The US Dow Jones Index fluctuated wildly for no reason. It opened at 15270, fell sharply to 15096, jumped suddenly to 15240, fell again to 15125. And that was just Monday and Tuesday. Wednesday saw a jump to 15226, followed by a collapse to 14988. Thursday/Friday were similar
• Meanwhile Japan’s Nikkei Index fell another 6% on Thursday, and entered a new bear market, down 20% on its peak seen less than a month ago on May 23. Over the same period, the yen has risen 9% after falling constantly since November
The only constant is that the inverse correlation between the US$: yen’s value (orange line) and crude oil prices (blue) has continued. Brent even managed a small increase last week as the dollar weakened again. Its role as a ‘store of value’ is back in favour, temporarily.
What happens next? The one clear conclusion is that record high oil prices coupled with increased market volatility is further destroying demand. As the ICIS pricing reports below make clear, buyers are understandably terrified of making any commitmentS and are buying ‘hand-to-mouth’. And soon, of course, we head into the seasonally quiet holiday months.
Anyone planning a well-deserved trip to the beach will no doubt be charging their batteries and checking internet connections before they go.
The chart shows latest benchmark price movements since January and ICIS pricing comments are below:
PTA China, red line, down 11%. “Weak macroeconomic environment weighed down buying sentiment”
Naphtha Europe, black, down 7%. “Supply is increasing on the back of a closed outbound arbitrage to the key US export market and a marginally open Asian arbitrage”
Benzene NWE, green, down 9%. “Weak derivative offtake in the US throughout 2013 has led to ample availability in the region, and up to 40KT of material is moving from the US into ARA”
Brent crude oil, blue, down 7%
HDPE USA export, yellow, up 9%. ” Trading activity was subdued as buyers wait for a clearer indication of where prices were headed”
US$: yen, orange, up 7%
S&P 500 stock market index, up 11%
