If yields on bonds can be used as a measure of fear then the German ten year bunds yielding precisely zero, would suggest fear is reaching extremes. Negligible yields on German bunds have been with us for a while, the bond-buying program from the ECB and lack of issuance being considered the catalyst.
Experience tells you that markets makes prices not governments, this would suggest there is more to the explanation than the one commonly accepted. It could be that banks and investors are comfortable holding an asset when they know there is a bigger buyer out there. Why the German government is not taking advantage of this opportunity to issue debt at such rates is a mystery to us, but probably not to greater minds. Issue ten-year German bunds yielding nothing and buy Dax exchange traded funds yielding 3%, in theory should be one of the great carry trade opportunities for any Central Bank.
The Sun may not be coming out from the clouds, but the newspaper came out behind the leave campaign on Tuesday morning. The Sun newspaper almost prides its self on not so much backing the winning horse but in times like these deciding for the country who the winning horse should be. The Brexit polls continue to indicate that the leave campaign is gaining strength. If this move is correct and the worlds leading economists are correct turkeys are effectively voting for Christmas.
Should we vote to leave, one could argue it could boost governments and central banks into another bout of coordinated action to support the global economy. To calm fears further governments could be encouraged act quickly to promote the idea of trade deals with countries such as China, Japan and America. Three of the largest economies in the world, that currently have no agreements with the United Kingdom or the European Union.
Central bankers and governments will have had plenty of warning that a brexit vote could be on the cards. One can only hope if they truly believe this event could materially destabilize the global economy one has to assume they are not sitting round fingers crossed it will not happen, but are making provisions for such an event to minimalize the impact. One would hope at least.
If the leavers take hold, perhaps the world brains could be turned to how this can work in a positive way for the global economy. Change brings opportunities, present circumstances don’t determine where you can go, just where you start from, to quote Nido Qubein.
We mentioned in our blog at the start of the week, the Vix could hit 20; it took one day as the index closed at 21.5, on Monday, another sign fear is taking hold.