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A problem deferred is not a problem solved

Published Monday, March 2nd, 2015

You would think given current stock market euphoria that a problem deferred is a problem solved. For investors in equities with little in the way of returns to be had elsewhere a problem deferred does not affect today’s revenues and profits. Very fragile ceasefires in Greece and Ukraine have been greeted with the equivalent of a relief rally which has taken most stock markets to new highs including the stubborn FTSE 100.

Bonds on the face of it tell a different story, one of worry, with safe haven yields falling into negative territory and at record lows. Dig a little deeper, however, and you will find that bond market hysteria is less about safe havens and more about speculative buyers front running the ECB whose QE programme begins this month.

Under the programme the ECB has to buy €60 billion a month of eurozone bonds spread in a pattern determined by the population and GDP size of its members, making German Bunds the largest element. A new size buyer is appearing in a market where supply is limited, guaranteeing that the price will rise. Rising bond prices means falling yields so many of last week’s buyers are expecting to sell to the ECB at a profit. Just another example of the distorting behaviour of QE.

to read the rest of the report, please click here

Posted by David Hufton