Are We Living In “A Riskless World”, Deutsche Asks
Two weeks ago, when looking at the performance of bank stocks, Deutsche Bank’s Oleg Melentyev noticed that the ongoing collapse in US bank stocks relative to the change in the S&P from all time highs was starting to hint at patterns last seen just before the last three major market crashes.
Needless to say, European stocks (and especially Melentyev’s own employer, Deutsche Bank) have been in a world of pain of their own. Which in turn brings us to Melentyev’s latest note, one which looks at a world without risk, courtesy of central banks.
A Riskless World
Only a few days into the post-UK referendum world, the market is back on its feet, fearing nothing and laughing at skeptics. So what if a 30yr socio-economic alliance at the heart of post-WWII world has ended? Politicians will figure out a Swiss-like arrangement for the UK, and the ECB will throw the capital keys out of the window. Everything’s gonna be all right.
Such an optimistic narrative does not surprise us in and of itself. What surprises us is zero value being put on a probability of this scenario not playing out. We tend to like markets that present either a discount for uncertainty or a convincing case for improving outlook. It is hard to argue that either one is here today. Even if one believes in the possibility of a watered-down political compromise between the UK and EU, pricing in zero risk of achieving and implementing it leaves no room for error. A long implementation time is not a benefit as it only creates more uncertainty. Several major EU economies are facing elections in the next 18 months, and the markets are going to react every time the word “referendum” is mentioned.
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