ICYMI: Four Recent Thought Pieces

Some of the commentary on this blog has a short shelf life.  It is meant to put the day's events into a larger context.  There are other pieces posted that aim to provide an interpretative framework or look at an issue in greater detail.  

In the past few days there have been four such thought pieces.  It might be helpful to put them in one place.  

1.  EU Parliamentary election:  Roughly 4 of 10 eligible voters participated in the election and of those 1 in 4 voted for an anti-EU party.  Those that did well have reason to celebrate their victories.  Those that did poorly can use their defeats to galvanize support.  However, in terms of realpolitik, the center-right and center-left will continue to dominate parliament.  Moreover, they do not have to confront a single anti-EU party, but a fragmented group that is unlikely to work together well.  In addition, there is a difference between the anti-immigrant and anti-EU parties, mostly in the North, and anti-austerity parties, mostly in the South. We do not see it as a political earthquake and do not see investors responding as if it were either.  

2.   Friends and Adversaries:  The confrontation with China in Asia and Russia in Europe was sparked by actions of allies.  Their actions provided an opportunity to try to redress a situation in which both China and Russia feel they have been disrespected.  Russia has demonstrated in numerous countries, including Georgia and Moldova, that will take advantage of such opportunities.  Japan nationalized disputed islands.  China could not let that go unanswered or risk emboldening others who have territorial disputes with it.    The ability to isolate Russia depends to a great extent on businesses and countries to look past immediate commercial interests.    Therein lies among the most serious challenges.  

3.  ECB:  The June 5 ECB meeting may very well be among the most important events of the year.  This post discusses a range of actions that ECB may undertake.  We then discuss the impact of the various policies on what we called BEEEP--bonds, Eonia, euro, economy and prices.  We think action is being discounted by the markets and this has seen the euro and yields fall.   The value of the BEEEP framework is that it encourages a disciplined way to think through the issues, even if one disputes our judgments.  

4.  Bond Conundrum:  The bond market rally, especially US Treasuries has been a major surprise this year.  The Fed's tapering was widely anticipated to produce higher bond yields.  Every observers seems to have her own pet explanation.  The problem is that there is not much data to verify or falsify most of the explanations.  And where data does exist, it does not seem to support some explanations.  For example, the gross short futures position is the highest in almost a decade, suggesting that short-covering was not a major force pushing up bond prices (and yields lower).