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Sentiment 7/2017

The considerations of excessive optimism on the markets and the various assets, which have long argued in this section, find further confirmations this month with some deteriorating data.

Common data emerged  by central banks meeting : the economy does not grow as expected and the inflation target has failed.

 In summary  central banks have to deal with key issues such as:  when to activate tapering and when raising rates.

In last meeting  FED postponed the expected  increase in rates to another date, stating that the economy is growing but needs further confirmation. In Europe  the conditions are certainly not better and the strong appreciation of the euro, if it continues, will have a negative impact.

Bank liquidity poured over all assets  creating the bubble of quotes that is under our eyes.

Some data should make us think:

·       1) today it has been announced that the Central Bank of Switzerland, although for various purposes, invests massively in the US market;

·        2)  In June - as reported in our letter - there were 76 shares of the SP500 marking new highs (today they are only 22);

·         3) Index prices have reached important levels and reduced the growth rate by increasing portfolio risk;

·       4)   We have seen the first drawbacks on the main European indexes except for our index, which is finally saved at last by the large presence of banks. Even the bmk SP500 with few volumes has marked new highs, but with the exchange rate effect is negative for European investors;

·       5)   Yields of two-year corporate bonds no rating, called junk bonds, make 0.91% against 1.35% of the same duration TBond. Similar situation in the euro area.

What will happen when central banks decide to reduce liquidity  to markets?

 

Looking at the trend of markets and assets we believe that for now this concern is far from the minds of investors.

 

08/10/2017

Giorgio Giovannoni

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