![]() ![]() As we had discussed, the relative attractiveness of U.S. ![]() The spread between Bunds and Treasuries finished the week at 142 basis points as the spread narrowed by 11 basis points. The 10-year German Bunds rallied by 2 basis points, hitting an all-time low of 0.86%. The 10-year British Gilt was the best performer among the tier-one sovereigns as rates fell by 14 basis points. Global sovereign rates benefited from the flight to quality as most markets saw rates fall. The tepid response from European Central Bank President Mario Draghi regarding stimulus and the potential for additional measures did little to assuage investors’ concerns about growth, as investors quickly pushed both European equities and bond yields lower. Investors are very worried that a German recession will not only exacerbate the economic malaise in Europe, but could also add to the deflationary pressures plaguing the region. ![]() The actual figures mark the largest drops in the data in 5 years. Exports fell by 5.8% (expectations were a drop of 4.0%) and factory orders fell by 5.7% (expectations were a drop of 2.5%). However, this week a series of data points raised concerns that Germany could be sliding into a recession. For much of the last two years Germany has been the economic engine of the region. One of the drivers behind this week's flight to quality was the ongoing concern around European growth. As I have discussed for the last several months, risk and the rules of the market are changing, and this week saw one of the largest reactions around these variables. For perspective, this was the highest reading since December 2012 and clearly speaks to the magnitude of the move this week. Volatility pushed up, breeching recent highs, as the VIX had a reading of 22. Credit spreads finished the week wider as investment grade bonds widened by 2 basis points while high-yield spreads widened by 10 basis points. Cumulatively, global stocks have lost $3.5 trillion in value since reaching record levels last month. Risk assets had one of their worst weeks of the year as global equities fell by 3 to 4 percent. In the spirit of 18th century maritime law, investors raised their “colors,” and they were red as they shed risk and pushed prices lower. monetary policy caused investors to shed risk. However, the continuing weakness in Europe, specifically the weaker data from Germany, coupled with the uncertainty around U.S. Many of the issues that were front and center this week were ones the markets had been dealing with for most of this year. In looking at the market this week, risk clearly fired a shot across the bow, demanding that investors show their colors. If the colors belonged to an enemy, the captain of the first ship would likely order an attack–but the initial shot was essential for making an engagement legitimate. The protocol for the ship that was “fired upon” was to raise its “colors” or flag, which would identify its origin and often signaled its intent. So, it was common practice in the 18th century maritime world for the captain of a ship to order a “shot across the bow” to hail an unidentified ship. In the days before radar and radio, ships could often not tell friend from foe on the high seas. ![]()
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