Deutsche Bank economist Torsten Sløk says the markets have never been this easy.
In an email on Monday morning, Sløk said that over the last few weeks, clients have said over and over that “markets have never been more difficult.”
And with recent volatility in equity markets, the unexpectedly stubborn drive lower in bond yields, and unexpected action from central banks around the world, this has become a commonly held sentiment.
But to Sløk, there are strong macro trends in place, notably lower oil prices and a strong US business cycle.
Markets have probably never been easier; there are strong macro trends in place in energy markets, FX markets, fixed income markets, and equity markets. The key driver of these trends is the decoupling of the US business cycle from the business cycles in the rest of the world. Another key driver is the decline in energy prices. Lower oil prices pushes the dollar up and a higher dollar combined with a weak recovery in the rest of the world pushes US long rates down and US equities up as foreign investors come to the US both for higher returns on assets but also because they are betting on continued dollar appreciation. In other words, US financial markets are not driven by fears of an overheating US economy and high US inflation but rather by foreign investors chasing yield in fixed income, equities, and FX. Two things can change these strong trends we are seeing at the moment: Higher inflation in the US or a decline in the supply of oil, see chart below. In my view, we are still several months away from either of these two things happening.
In his email, Sløk included the following chart, versions of which we’ve highlighted before, showing the huge ramp in crude oil production and oil inventories.
Until this trend changes, Sløk sees a clear path for markets.
And as for the strong trend in currency markets? Here’s the US dollar’s massive breakout.
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