European equities are still trading at 18.6x

Whether a Spac, Bitcoin, Ark’s ETFs or collecting art, all assets are in sync with Central Banks’ signalling. Bitcoin broke rank when banned by China. Its breaking of ranks happened on the very day when the Fed discussed how to discuss with markets to avoid a repeat of the Bernanke’s taper tantrum. The corresponding confirmation of rising questions marks about the Fed’s way of tackling inflation justified taking profits over the previous few days. 

The question is whether these discreet events will reconnect into a mighty downward spiral. There are not such signs for now. Momentum metrics show no breaking dykes. Long rates in the US stay around 1.6% and, yes, the extraordinarily easy money conditions have become only very marginally less so with European long rates trading at 0% rather than –20bp.

While trading rooms contemplate the costs of buying a week of holidays in Miami or Ibiza, sharply rising hospitality prices leave these navel-centric self-styled macro observers to conclude that inflation is on its way. It will take a lot of time to conclude that there is lasting supply scarcity with the transmission power to anchor inflation. 

The risks are not there. They sit in the fact that dud assets are there for all to see but not properly priced, courtesy of cheap money. Bitcoin is an example, the $2tn of Chinese corporate debt that needs to be rolled with fake ratings is another, as is the volume of dud loans in Europe that have yet to crystallise. Not to mention of course the issue of retiring the vast amounts of debt printed in a rush and leading to worsening wealth distribution.

For equities, risks also sit in the incomprehensible pricing signals sent by the shift to ESG compliant assets. Each layer of the ESG onion is springing its own surprise that markets cannot price: are solar panels deployed by say Iberdrola ESG kosher if they have been manufactured by Uighur forced labour? Such pricing uncertainty must have a negative impact on the cost of capital which is in itself a sure trigger for a correction. The ESG freight train is more likely to wreak havoc in the markets than much heralded inflation. 

Oh, and after those recent bouts of market weakness, European equities are still trading at 18.6x 2021. They peaked at 19.6x on 16/04/2021.

European equities only marginally cheaper

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