Greece and commodity prices continue to make the headlines, probably against many expectations raw material prices have now regained most of this year's early losses. The CRB Reuters commodity index is now almost flat on the year. We have discussed in this blog the change in sentiment that is taking place, as investors appear to be moving out of the more defensive names and back to the mining and oil shares. This change in sentiment may not last; indeed Tuesday saw a modest reversal, as nothing much appears to have changed to the global economy, but it has probably caught a few unaware. It is often said that markets are forward looking and perhaps this recent recovery in commodity prices is a lead indicator for an uptick in the global economy later in the year.
We have argued before that the fall in energy prices might have a geared effect on the general public’s purse, firstly cheaper energy will boost disposable income and secondly employers may be able to use some of the cost savings to increase wages. On Tuesday the Prime minister, David Cameron, called for just this to happen. We reiterate our view that the fall in oil prices will lead to the inflationary boost that Central bankers have been hoping for. However at present it seems to have had the opposite effect on their sentiment as rather than focus on the longer-term effects central bankers thoughts are on the short-term impact the falling oil price has had on inflation expectations.
If we are correct, the fall in energy prices probably means personal households are in a better position to handle a modest rate rise than at any time in the past 7 years. Bond yields have started to tick higher despite continued capital inflows (another possible sign of an improving economic outlook). Bond investors appear complacent about inflationary pressures as much as central bankers. Sentiment can change very quickly as we have seen with commodity prices with no discernible change of circumstances.
With regards to the ongoing situation to Greece, Alan Greenspan recently added his voice to the debate as he announced he believed that Greece would not remain the euro. Nobody really knows what the outcome will be but whilst the will of the Greek people remains to stay within the monetary union, every effort will be made to ensure that happens. European leaders will have one eye on Spain whilst they attempt a solution to the Greek puzzle, as later in the year Spain holds elections and the far left, as was the case with Greece, are making inroads. Any indication that a far left government can affect a more positive outcome for a country burdened by debt in the euro zone will only strengthen their position in the polls. On the positive side the situation with regards to Greek debt could not continue for ever and at least the election of the Syriza party appears to be brining matters to head that may see a longer term more practical solution for Greece.