All the talk is of negative interest rates and the high risk of crisis they reflect. But Europe’s new policy flexibility makes imminent crisis less likely. Investors are already responding, with super-expensive safe haven bonds weakening. Global risk assets such as stocks and commodities, on the other hand, have rallied - and may go further.
Europe’s response to its raging storm has been to bend rather than break. Tentative steps taken by the European Central Bank on August 2 have bolstered confidence a bit, putting a floor under the euro. If the European Central Bank, or the bailout funds, were to agree to buy Spanish and Italian bonds, yields would certainly fall, easing the immediate pressure and buying time.
Europe’s tentative stabilisation has lent support to the euro, which has recovered from lows of below $1.21 on July 24 to reach $1.24. A strong euro rally, on the other hand, looks unlikely. Euro zone recession is a negative. So is the continuing risk - for the euro and all risk assets - that Germany will block more flexible ECB policy. But the euro’s fast slide should end for now.
Rapid gains in stocks and commodities, given the continuing worries about Europe and global growth, also look unlikely. But a more promising US jobs report on August 3 did much to revive global risk appetite and data showing the highest job openings since May 2008 is further encouragement. Global manufacturing was dragged down this summer by the euro crisis and by the domestic struggles of the US economy. But there may now have been a bottoming in the pace of growth.
Yields on US 10-year Treasuries, the ultimate safe haven, have already risen from 1.4 per cent to 1.7 per cent since July 24. August 8 also saw the weakest bid-to-cover ratio at a Treasury auction since 2009. German bunds of similar duration have also weakened, their yields rising from below 1.2 per cent in late July to 1.4 per cent now. Stocks, oil and other commodities, on the other hand, have sprung up in recent days. The US S&P 500, having gone through 1,400, has run up just under 10 per cent since early June. Europe’s Stoxx 600 is up 15 per cent over the same period. Brent crude oil is up more than 20 per cent from the mid-year lows.
Fresh economic shocks could prompt a rapid rethink. Uncertainties remain great. Risk assets are a play on economic recovery and on European policy-making flexibility. Neither can be relied on. But if Europe shores itself up and global growth fears ease, the downside for safe havens is big and riskier assets look the better bet.
