Shifts Away From Bonds in 2011
Shifts Away From Bonds in 2011
Oil prices have moved above the $90pb level into the close of the year, up nearly 8% so far in December. We are entering a period that feels similar to the first half of 2008, when oil190-721 prices were surging higher, along with many food prices. On the latter, note that the S&P index on softs has increased over 80% in the second half of this year. A fair proportion of this is from disappointing wheat harvests, but nevertheless there is plenty of other evidence that wider food price inflation is heading higher. As we move into the new year, this presents policy makers with the dilemma whether to worry about the inflationary impact, or the impact on consumer purchasing, as the remaining income available for non-fuel and food purchases is reduced. For many, raising interest rates would be counter-productive, but it will make the central bank’s dilemmas that much bigger in 2011.
More signs of shifts away from bonds. Following on from yesterday’s Daily Brief where we discussed shifts away from bonds, there is more evidence from the Investment Company Institute in Washington, who report that last week saw the biggest withdrawals from US bond mutual funds in two years. US 10 year yields peaked above the 3.50% level earlier this month, having been below 2.50% early in November.
Greece passes 2011 budget. The Greek parliament last night passed the budget that will enact further austerity to cut the deficit from 9.4% of GDP to 7.4% of GDP. The vote was 156 to 142, so not an overwhelming endorsement, reflecting the continued strain such austerity is having politically, as well as on many other levels.
Portugal may get some help from China. There were reports yesterday in the Portuguese press that China was considering buying Portuguese government debt. The report (in ‘Jornal de Negocios’) cited this as ‘significant amounts’ and this follows on from reports earlier this week from the Vice Premier in China, who made positive noises about the euro area, something which you don’t hear that often these days. This provided some background support to the euro during the first half of the European session.
South Korea starts military exercise. South Korea undertook a military exercise on Thursday, in between Seoul and the border with North Korea. Naturally, this met with condemnation from the North, although for now nothing in190-831 the way of retaliatory action. It’s clear that tensions remain high and this remains a key risk factor for markets, especially whilst trading is thin into year end.
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