Already five years have passed since the EU was infected by the subprime mortgage crisis gnawing on the US economy. Today the end of the credit crunch is still nowhere to be seen and the permanently undermined investor confidence in EU peripheral countries' economies pushes successive Eurozone members to queue for international bailout.
The debt crisis, which at present affects the entire world, originated from excessive investor speculation and the housing bubble in the US which finally burst in 2006. In August 2008 an epidemic of defaults on mortgage loans triggered a crisis severely affecting the mortgage market.
August 9, 2007 is widely considered to be the unofficial anniversary of the onset of the global debt crisis. On that day BNP Paribas blocked access to its three major US subprime mortgage funds, due to a “complete evaporation of liquidity in certain market segments of the US secularization market” as the French bank explained in a press release. The ECB, alarmed by the news, decided to inject 94.8 billion euros into the market to stop the fallout from the US mortgage crisis.
One year later the US investment bank Lehman Brothers filed for bankruptcy - the largest recorded in the history of the country. Other financial institutions came crashing down, including Bear Sterns, Goldman Sachs or US government mortgage corporations such as Fannie Mae and Freddie Mac.
The wave of defaults hugely weighed on the already weakened European financial system, the crisis soon affecting not only financial institutions but entire countries. Greece was the first Eurozone member to ask for an international bailout in May 2010. In November of the same year Ireland was forced to follow in its steps, while Portugal asked for rescue in April 2011. Later that year the ECB stared purchasing Italian and Spanish debt in order to reassure the markets.
Even though up until today many steps have been taken to curb the crisis, by central banks, regulators and legislators around the world, there is no apparent end to the turbulence on the financial markets. The US and China are struggling to reactivate economic growth. In Europe, Spanish and Italian risk premiums have been reaching record highs in recent months and both countries are contemplating asking for aid. Social discontent caused by the introduction of harsh austerity measures is steadily growing.
The EU is trying to fend off danger by tightening the financial union in the region, but a lack of concord between individual member states and the slowness of decision-making is undermining the project. More and more voices can be heard that the most fragile countries should leave the Eurozone in order to ensure its survival. Will the euro manage to endure the financial crisis whirlwind? Only time will tell...
5 year Intermarket Performance - Gonçalo Moreira reads the graph
Commodities which have been falling since middle 2006, bottomed at the start of 2007 and rallied sharp into the summer of 2008. The usually positively correlated yield and commodity markets started to diverge: the fall in yields during 2007 didn't help stocks. The US dollar was the only asset to gain from the deflationary event caused by the housing crisis. Investors switched to the dollar as a flight to safety.
In 2009, rising commodities and rising yields (weaker bond prices), sent out the message that the deflationary threat caused by the financial meltdown was diminishing. This resulted in a positive sign for the stock market which bottomed at the start of the year and kept rallying since then.
But while the commodity and bond relationship was the usual inverted one, a deflationary sign during this time was the fact that stocks also escalated higher and decoupled from bonds. At the beginning of 2010, stocks and bonds returned to their normal positive correlation until today.
Since 2011, bonds have been acting as safe-haven with commodities plummeting. The interesting point is that stocks have been also perceived as a good investment and have been staging a bull run.
In all these years, the dollar-commodities relationship hasn't changed from its normal pattern which is an inverted one. A rising dollar which bottomed in spring 2011 also contributed to the fall in commodities which peaked at the same time.
The negative influence of rising commodities on stocks holds true during inflationary and disinflationary periods - but not necessarily during a deflationary threat like the one of 2008. In a deflation, rising commodity prices are generally positive for stocks. Falling (or flat) commodity prices like we have seen since 2011 can also be good for stocks by creating disinflation. In the event commodities collapse, then stocks would be negatively impacted because a beneficial disinflation would turn into a harmful deflation. Except yields, which have underperformed almost 70%, all other asset clases, including the US dollar, show the same relative performance compared to the starting point of 2007.
