Tue, 14 Aug 2018 04:31 IST
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Deutsche Bank Early Morning Reid – August 9, 2018

It’s hard to believe that its 5 years ago today that the financial world started to appreciate the magnitude of the problems that would be the soundtrack to our lives over the last 5 years. The real warning signs of trouble occurred 6 months earlier with the precipitous drops in the sub-prime indices however the global ramifications were first arguably felt on August 9th 2007 as BNP Paribas stopped
withdrawals from 3 of its investment funds as it couldn’t value their holdings following the subprime fallout.

This was the day money markets started to seize up and the ECB were forced to pump in €94.8bn to help liquidity. A month later there were queues outside the UK’s Northern Rock in what was the first bank run in the country for around a century and a half. In today’s pdf (url link attached at the bottom) we show a graph of the performance of a wide selection of global assets since this fateful day.
Selected commodities are by far and away the best performers over the period led by Corn (+144%), Gold (+144%), Silver (+122%) and Brent (+61%). The liquidity injections seen over these five years have undoubtedly helped these assets. Fixed income take up all the next slots with US IG non-financial credit (+55%) leading the way with Gilts (+54% next in line). Even EU senior financials (+32%) have
performed well in absolute terms and have out-performed all the equity markets in our sample. The FTSE 100 (+15%) leads our equity universe with only the Bovespa (+10%), the S&P500 (+8%) and the Hang Seng (+6%) in positive territory. Interestingly Spanish Government bonds (14%) and EU sub financials (+14%) beat these last 3. As we move into negative territory its mostly made up
of European equity markets (especially peripheral ones), bank equity indices (US - 50% and Europe -67%) and the Nikkei (-44%) and Shanghai Composite (-50%).

Overall one would have to say that for many commodities and most fixed income assets, it’s been a pretty good 5-year crisis. For equities the safer markets have held up well considering all that has happened (albeit well below long-term returns) but those markets with ‘issues’ have had a pretty poor 5 years. Given all that’s gone on over this period it’s fair to say that returns have been pretty good if
you’ve been in the right areas. The authorities have played a big part in ensuring the period wasn’t a disaster even if there have been frightening periods and very poor returns in some areas. Given that there are still numerous unresolved issues, the authorities need to continue to be on full alert for the next 5 years to ensure that when we do the 10 year anniversary there haven’t been set-backs in many of these assets. With continued aggressive intervention there likely will be.

Anyway please turn over the page for the chart. As for current markets it seems we’ve entered a lull after a hectic couple of weeks dominated by Mr Draghi. Indeed equity markets were little changed on both sides of the Atlantic with the S&P 500 (+0.06%). Dow (+0.05%), FTSE (+0.08%), DAX (-0.03%), FTSEMIB (+0.07%) all deviating less than 0.1% from their previous day’s closes. Core rates
weakened with UST 10 year yields rising 2bp to 1.649%, the fourth successive day of weakness which is the longest losing streak since 19th March 2018.

The 10yr yield is another 4bp higher overnight as Asian equities are trading with a stronger tone. The Hang Seng and Nikkei are up +0.9% and +1.0% respectively as we type as a further decline in Chinese prices promoted easing hopes. The Chinese CPI print came in at 1.8% for July – in line with market consensus. PPI was -2.9% against the -2.5% expected. The Shanghai Composite (+0.2%) is modestly higher ahead of the next batch of Chinese data (retail sales, fixed income investment and IP at 6.30am London as we go to print). Away from equities Asian credit markets are quiet with Singapore out on National Day.

Back to Europe, the WSJ reported that the Troika review of Greece’s programme has been delayed from September to October hence discussion of the next aid disbursement of EU31bn will not happen until then. The article said the Troika would visit Athens in early
September and stay the whole month in order to report to the Eurogroup meeting on the 9th October. An EU official said the troika had been able to identify EU7bn in cuts last week but a remaining EU4.5bn of concrete and implementable measures would need to be worked out in September.

In the day ahead, trade numbers from Italy, Portugal and the UK are the main European releases. Greece will also be reporting its latest IP and unemployment numbers. The ECB will publish its latest monthly report. In the US, we have the usual jobless claims report along with mortgage delinquencies. There is also a US treasury auction of $16bnn in 30-yr.

Jim Reid

Colin Tan, CFA
Research Analyst

Deutsche Bank