On October Blues and the BOJ; Is Drinking Milk Good for you?!

From: aditya rana
Date: Sun, Nov 2, 2014 at 2:15 PM
Subject: On October Blues and the BOJ; Is Drinking Milk Good for you?!


The annual pattern of market turbulence in late September and first half October was repeated this year, followed by an impressive rally in global risk assets this past week. What is the market trying to tell us and what factors could have driven the sharp downturn? Gavyn Davies, chairman of Fulcrum Asset Management, recently wrote two interesting columns in his FT blog which provide some great insights into recent events. To summarise:

-The extraordinary volatility in all financial assets during the week of October 13 was best reflected in the movements of perhaps the most liquid financial instrument in the world – the 10 year US Treasury bond, which traded at yields of 2.21% and 1.86% within the space of a few hours.

-Just a few weeks earlier there was a growing consensus that a strengthening U.S. economy would lead to a stronger dollar and a tighter Fed rate policy. However, price movements of risk assets during the previous week, exacerbated by abrupt reversals of speculative positions, pointed to a world heading into another recession.

-All risk assets sold-off sharply (see graph below) in a manner consistent with a contractionary demand shock – ranging from U.S. equities to international equities, commodities, with credit spreads widenening (including European sovereign spreads), and cyclical stocks underperformed defensive stocks.

-However, data surprises show no major shock to the world economy, with weakness in the Euro area having been offset by upward revisions in the U.S. and even recently in China. “Nowcasts” which probably provide the most accurate snapshots of recent economic activity (see chart below), show global growth at 3.7% , with the nowcast for China firming-up since their policy easing in February. These have been supported by global PMI surveys, and J.P. Morgan noted that signs of above trend GDP growth are now emerging.

-If it is not a drop in GDP data, then was it the marked drop in inflation expectations around the world which could have caused the market volatility. This has been led again by Europe, with the inflation swaps market (see chart below) showing inflation expectations well below the 2% target. The market has become increasingly sceptical of the ECB’s ability to thwart a Japan type deflationary environment, and it needs to alter this perception by taking more drastic steps in the near future.

-In addition to the above factor, the 25% drop in oil prices since June triggered by an increase in oil supply, has acted as a supply shock to oil exporting nations, and in a low inflation environment this could have a negative deflationary impact due to a rise in real interest rates making it more difficult to service debt. However, this is a net positive for oil importing nations and as long as inflationary expectations remained fixed (as they are outside the Euro area) the oil shock should be beneficial in increasing world real GDP by 0.5-1.0%.

-One possible cause for the turmoil could be that markets are finally beginning to doubt whether central banks have the ability to stop global deflationary forces. As Ben Bernanke wisely noted about QE, it “works in practice but not in theory”, meaning that it only works because it shifts inflation and other economic expectations in the desired direction. If markets have truly begun to doubt then we could be in for serious trouble, but the swift reversal in markets following hints by Fed officials about further asset purchases, suggests that we are not at that point yet.

An insightful piece which shows that the probable cause for the market turmoil was the sharp decline in inflationary expectations in Europe, increasing the likelihood of more aggressive measures by the ECB to boost its balance sheet. The new LTRO program and the purchases of covered bonds by the ECB will be partially offset by the continuing repayments of the old LTRO program, increasing the likelihood of a full-blown QE program to purchase government bonds in the secondary market and even possible corporate bonds in order to meet the stated objective of increasing their balance sheet to its previous high. However, this event might be pushed into early 2015, once the take-up on the new LTRO program is announced in December.

Meanwhile, news from Japan yesterday provided a big boost to markets – with the BOJ announcing an unexpected increase in their annual QE program to Yen 80 trillion ($726 billion – up from Yen 60-70 trillion), tripling the annual purchase of equity ETFs to Yen 3 trillion, and the government pension fund (GPIF) announcing an increase to its equity portfolio (domestic and international) to 25%. The Japanese market has broken out of its 12 month trading range, and given its previously oversold condition, it has considerable upside momentum. ETFs with an in-built Yen hedge (DXJ, DXJS) would be the preferred choices, as the Yen is also likely to depreciate further.

The markets outlook into year-end is positive given the recent improvement in global GDP data, the BOJ and the ECB taking on the QE mandate from the Fed, and that we are going into the traditionally favourable season for stocks (November 1 to May 1). However, expect higher volatility, particularly around the forthcoming signalling by the Fed of a rate increase sometime in 2015 (by removing the “considerable period” language perhaps at their December meeting?). Stay long risk assets for the moment.

Drinking Milk Associated with Fractures and Death:

The evidence against drinking milk continues to mount – a study recently released in the British Medical Journal shows the possible relationship between milk consumption and increased risk of fractures and death.

PRCM, 10/30/2014


High cow’s milk intake is associated with increased risk for bone fractures and death, according to a new study in the British Medical Journal. Swedish esearchers followed 61,433 women and 45,339 men for more than 20 years and 11 years, respectively.

-Among women, those who consumed three or more glasses of milk per day had a 60 percent increased risk for developing a hip fracture and a 16 percent increased risk for developing any bone fracture. These results are similar to previous studies showing no protective effect of increased milk consumption on fracture risk.

-Additionally among women, for each glass of milk consumed, risk of dying from all causes increased by 15 percent, from heart disease by 15 percent, and from cancer by 7 percent. For the women who consumed three or more glasses of milk per day, compared with less than one glass, risk of dying increased by 93 percent. Men had a 10 percent increased risk of dying when consuming three or more glasses of milk per day, compared with less than one glass.

PRCM provides further research on the adverse effects of milk consumption. To summarise: http://www.pcrm.org/health/diets/vegdiets/health-concerns-about-dairy-products

-Clinical research shows that dairy products have little or no benefit for bones.

-Though calcium is necessary for ensuring bone health, the actual benefits of calcium intake do not exist after consumption passes a certain threshold. Consuming more than approximately 600 milligrams per day—easily achieved without dairy products or calcium supplements—does not improve bone integrity.

It is possible to decrease the risk of osteoporosis by reducing sodium intake in the diet, increasing intake of fruits and vegetables, and ensuring adequate calcium intake from plant foods such as kale, broccoli, and other leafy green vegetables and beans. You can also use calcium-fortified products such as breakfast cereals and juices and soybeans.

-Exercise is one of the most effective ways to increase bone density and decrease the risk of osteoporosis.

-Dairy products—including cheese, ice cream, milk, butter, and yogurt—contribute significant amounts of cholesterol and saturated fat to the diet.Diets high in fat and especially in saturated fat can increase the risk of heart disease and can cause other serious health problems.

-Consumption of dairy products has also been linked to higher risk for various cancers, especially to cancers of the reproductive system. Most significantly, dairy product consumption has been linked to increased risk for prostateand breast cancers.

-The danger of dairy product consumption as it relates to prostate and breast cancers is most likely related to increases in insulin-like growth factor (IGF-1), which is found in cow’s milk. Consumption of milk and dairy products on a regular basis has been shown to increase circulating levels of IGF-1.

Here’s to a good market environment into year-end and staying off milk!




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