The last six months' market behavior is somewhat breath-takingly similar to the same period a year ago. With global central banks pumping (RoW replacing Fed for now), energy prices soaring, and since the market is the economy - hope is rising that we are doing better; the drivers of the asset price reflation are similar too. While Treasury yields appear to be bucking this sentiment-euphoria, perhaps it is the because the US is the hottest market and all the world's money comes here that we are 'decoupling'. It seems the stakes are higher and scale of known unknowns even larger this time as the can that we are kicking is gathering a lot of trash as it rolls down the road.
Perhaps the 'events' and collateral needs around CDS roll dates and IMM dates (highlighted in the chart) - which just happens to coincide with the March Greek bond maturity next month - will prove once again that this time its no different.
And from Goldman on the 'similarities':
A sharp increase in oil and gasoline prices with political volatility mounting in the Middle-East. The most obvious similarity to last year is the fact that crude oil prices have been rising sharply since the turn of the year. Between December and the last week of February 2011, Brent crude prices rose by about 20%. Over a similar period – from December till now – crude prices have risen by about 13%. While the extent of price rise over this three month period is a bit less this time around, crude prices have started at a higher level. So Brent crude increased from about $89/bbl to about $106/bbl from Dec till late-Feb last year, whereas the move this year has been from $109/bbl to $122.9/bbl. Gasoline prices have also increased sharply both this year and last year. Since December, the increase in gasoline prices has actually outpaced the one from last year – rising by about 18% this year versus about 10% last year. Last year gasoline prices went on to rise by almost 50% between Dec and end-April, and this was an important part of the explanation of the subsequent US economic slowdown in 2011.
Another disconcerting similarity to last year is the concerns around political volatility in the Middle-East with the potential for supply disruptions coming on top of a tight market. After earlier political unrest in Tunisia and Egypt, Libya was in the throes of a political revolution by mid-February, which rapidly deteriorated into civil war by March. The ensuing prospect of disruptions from a significant global oil producer caused oil prices to spike further, so that they exceeded $125/bbl by early April. This time around, concerns have been centred on Iran, and the possibility of supply shortfalls from there either because of embargos or disruptions in key shipping lanes.
A backdrop of improving cyclical momentum across the world. The increases in crude oil prices both last year and this year have come against the backdrop of improving cyclical data. From December through Feb last year, our aggregated global PMI measure increased from 55.1 to 56.5. And this year too, global PMIs have increased from 49.6 in November to 51.8 in January. The difference in levels is worth noting: the oil price increases this year have occurred with PMI levels much lower on average than last year. That said, the increase in PMIs this time around is more even – with increases both in EM and DM, whereas the last year the increase was primarily focussed on DMs. EM PMIs were more or less flat as most EMs were tightening policy to restrain high rates of inflation.
February brought the first signs that the higher commodity prices were beginning to weigh on growth. As oil prices moved higher through February last year, we saw the first signs that growth-sensitive assets started to falter. Our WF US Growth basket peaked in February last year (even as the index itself continued to move higher) after increasing by 12% since December 2010, and this year too, our growth basket has struggled to advance in recent weeks despite the tailwind of better macro data. Other growth-sensitive assets like copper also exhibited a similar pattern.
Charts: Bloomberg (courtesy of SocGen's Albert Edwards)