ザ・スミスとマーケット

When good news is good news and so is bad news 

I was looking for a job and then I found a job, 
  And heaven knows I'm miserable now. 
   -The Smiths, 1984 


Sometimes it's heads I win, tails I win. The stock market rally of the past two months is real, and unmistakably  being treated as such. The S&P 500 was yesterday up 25 per cent from its lowest point in October, satisfying the usual definition of a bull market. Mergers and acquisitions are starting to return after a long gap. 


But this rally has been driven by two forces that tend to cancel each other out. One is the promise of easy money from central banks, which is often on hand to stave off a crisis or to jolt an economy out of a slump. The other is the belief that economies are faring better - which implies that markets are less likely to get their dose of easy money. 


For this reason, markets often have a Smiths-like lugubrious reaction to positive economic news. But now markets are plugging in to an altogether trippier mode. It might even be possible, thanks to the way that European and US economic cycles have drifted apart, to have the best of both worlds; easier money in Europe and economic growth in the US.


US unemployment data are notoriously unreliable. But the January data, which saw 230,000 Americans join non-farm payrolls, while the unemployment rate fell to 8.3 per cent (it reached 10 per cent in 2009), cannot be explained away. Employment is expanding. 


That makes the Federal Reserve less likely to resort to further quantitative easing (buying Treasury bonds to push down their yields  and thereby lower interest rates for the economy as a whole). But risky assets are still doing well, perhaps because of optimism about Europe.


All is not well on the eurozone's periphery. Portuguese government bond yields surged to much the same levels that forced Greece to ask the EU for a second bail-out last year. Talks over how much of a hit banks should take in Greece's likely default next month have dragged on. And a European Central Bank report this week suggested an incipient credit crunch as banks tightened their lending standards.


And yet the mood surrounding Italy and Spain is upbeat. Anyone who bought the two countries' bonds when concern about the eurozone was at its most intense, in November last year, has made 20 per cent since then. Meanwhile, eurozone bank stocks are up 36 per cent since then.


The explanation takes only four letters: LTRO (long-term refinancing operation). It refers to the European Central Bank's offer to let banks borrow from it for three years using very generous collateral. When unveiled by Mario Draghi, the incoming ECB president, late last year, many were disappointed that he was not buying government bonds directly.


But now, traders believe the move cuts any risk of a "Lehman moment" drastically. In other words, if a European sovereign default was to happen, the chance of a cascading bank collapse in response is much reduced. And the total assets on the ECB's balance sheet have leapt by 44 per cent in six months. Maybe it will now resort to printing money. The short-term implications would be good for European banks.


To explain this rally using history, there are two decent recent parallels. In 2010, the first Greek bail-out and some insipid US economic data caused stocks and commodities to sell off. That was arrested in August of that year when Ben Bernanke of the Federal Reserve signalled that more quantitative easing was on the way.


Twice since 2008, in the springs of 2010 and 2011, US monthly jobs growth has exceeded 230,000. Both times it went on to fizzle. That fits the notion that after a financial crisis the economy is doomed to move sideways. Growth shifts in response to shifts in monetary policy.


A second analogy is more troublesome. After the meltdown of the Long-Term Capital Management hedge fund in 1998, which brought global credit markets to a standstill, there was a dramatic rally once the Federal Reserve decided to cut rates.


Traders believed this proved that central bank money would always be there to bail out ailing financial groups. The LTCM template was followed several times in the years before the Lehman disaster - for example, Fed intervention sparked rallies after the crises for Countrywide Financial in 2007 and Bear Sterns in early 2008.


At the moment, markets in Europe seem to be following the LTCM pattern. Having pushed up Italian and Spanish yields to unbearable levels, they have forced the ECB to act. Now they can party.


This is dangerous, even if it is more cheerful than listening to the Smiths. But the resumption of growth in the US, and the successful crisis management by the ECB, have bought much time for politicians to try to deal with the deeper problems of the eurozone. Let's hope they use it. from FT