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Don't Get Greedy and Don't Try to Time The Top of This Tired 10-year Bull Market

Batten down the hatches. The late-cycle lift from Donald Trump’s $1 trillion fiscal stimulus is fading before China comes close to touching bottom.

We have hit a global vacuum. If semiconductor sales are the canary in the coal mine for the world economy, be careful. Korean shipments fell 25pc in February year-on-year. “That canary has completely keeled over. Collapse comes to mind,” said Lakshman Achuthan from the Economic Cycle Research Institute.

Ruslan Bikbov from Citigroup said the US yield curve is “already priced for recession”. Should the US economy tip over at this juncture, the tail-risks for the world are murderous. “The situation is especially dire in Europe where the ECB never had a chance to normalize. Europe may see a recession when rates are still negative,” he said.

The 10-year German Bund yield crashed below zero on Friday after IHS Markit’s gauge of manufacturing orders dropped to slump levels of 40.7, last seen in 2009. Can we now stop pretending that Germany is in rude good health, briefly held back by new car standards (last September) and low water levels on the Rhine?

The Bund yield has been negative before. It dropped to minus 0.13pc in mid-2016 but the indicator was distorted. The ECB was then buying €80bn of eurozone bonds each month. QE was gobbling up scarce Bund supply.  It is more sinister this time. QE has been shut down (into the teeth of a slowdown, a repeat of the ECB’s 2008 and 2011 beauties).

The Bund today is a purer warning of looming deflation.  This is a double-barreled menace for Euroland: it threatens a fresh downward leg for the crumbling STOXX bank equity index (off 32pc drop since early 2018) and a credit crunch; it brings Italy’s knife-edge debt dynamics into sharp focus.

Italy’s borrowing needs are again rising faster than nominal GDP. The debt ratio jumped a percentage point to 132.1pc in 2018. The Italian recession is well into its third quarter. This is not stable stagnation a la Japonnaise. Italian yields may suddenly go ‘non-linear’ as in mid-2011.

The eurozone still has no-lender of last resort. The ECB can act only in union with the bail-out fund (ESM), which requires a Bundestag vote. The sovereign /bank ‘doom loop’ never left us. Brian Coulton from Fitch says the ECB will be forced to renew QE later this year. This may indeed happen but the political bar to fresh bond purchases is exorbitantly high. First there would have to be a crisis.

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