As highlighted in last week’s Strategy: A blue world is good for risk assets, Friday 20 February, the current phase of the business cycle with global growth acceleration and accommodative monetary policy is the best world for risk assets. This was confirmed in the past week with new highs for most major stock indices and new lows for credit and peripheral bond spreads. In addition to being in the blue phase, risk assets have seen a boost from a decline in tail risks in the past weeks:
1. Grexit: Greece and the EU reached a deal last Friday and reduced the probability of a Greek exit from the euro. On Tuesday the new Greek government sent a list of reforms to the euro group which so far has been endorsed (on condition that they are actually implemented). Barring any new set-backs this will pave the way for Greece receiving another loan payment from the EU in May and bridge financing until then.
2. Crude Oil collapse: While the decline in oil prices provides a boost to global consumers it is also a tail risk as it may trigger financial turbulence in Russia and the US high-yield markets (where energy is around 20% of the market). However, over the past few weeks the oil price has found a bottom: oil prices halted their decline at USD45 per barrel (Brent) in mid-January and have increased to around USD60 during February. A sharp decline in the US oil rig count to the lowest level since 2011 and a big reduction in investment plans from the major oil companies have contributed to the stabilisation. Saudi oil minister Naimi also stated this week that ‘we want to see calm markets’ and added that ‘global oil demand is growing’. It thus seems that the Saudis are trying to talk some stability into the market as they are also aware of the risk of the negative effects on oil demand if the collapse in prices pushes Russia and US high-yield over the edge.
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