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The rational markets hypothesis

| Posted by: Paul Donovan | Tags: Paul Donovan

  • Japan's equity market rose 7.7%. Was there a surge in economic activity? Has Abenomics started working? Has Abenomics just started doing something? No. Perhaps the release of M3 money supply induced a sense of wild euphoria amongst investors. Then again perhaps not.
  • We can only conclude that either Japanese equities' pricing was irrational yesterday, or it is irrational today. However stronger risk markets do feedback into economics. Improving risk markets will remove barriers to the US Federal Reserve raising rates in September.
  • There is little new economic information from the rest of the world – though that has not stopped the Asian markets. Juncker of the EU gives a state of the union address ("not good" would be a fair summary, although the cyclical economic position is improving).
  • One for the economic geeks (the best kind of geeks) might be the release of Greek CPI. Greece appears to have a dual pricing structure for parts of its economy – one price in electronic euros, one heavily discounted price for physical cash payments. How bad Greek deflation is reported to be may depend on the form of payment.