Reliefrallyandinefficiencyofmodels

As the varied news from the world of meteorology, space exploration and epidemiology (obvious one!) made headlines over the weekend, it is interesting to see how these different worlds impact on the world of finance. On the weather forecasting front, a cyclonic event, the likes of which has not been seen in the last century, is expected to hit the Mumbai coast in the coming days. The Meteorology department forecasts that it will bring heavy wind and rain in its wake. On the space exploration side, the SpaceX rocket has safely docked with the International Space Station. Lastly on the epidemiology front, India has decided the contours of the next phase of lockdown which will entail multiple relaxations.

In a speech in 2010 during the ECB annual conference, the then president of ECB Jean-Claude Juncker spoke about the state of finance and central banking and its shortcomings. He said that the models used by central banks across the world fail during a stress situations. He explained that the models used in other fields like meteorology, physics and epidemiology assume their subjects to be part of complex adaptive systems where numerous feedback loops exist and impact the outcomes, whereas in finance the models follow the theory of market efficiency and rational optimization which overlooks the interaction between the system components and feedback. Juncker says that in the case of a stress situation, the monetary policy transmission fails and hence the tools at the disposal of the central banks become all but ineffective. 10 years later, in another stress situation, his statements are still not very far off. We can see that all the money pumping by the central banks has not been able to start the credit cycle… yet.

In other news, the big event of Friday was the US President’s press conference on China, which didn’t create the huge ripples it was expected to do. The equity markets closed the day almost on par. The President announced the US withdrawal from the WHO and stressed the importance of protecting US IP from China. The Armageddon option that Trump might announce the rolling back of the Sino US deal was not used. As the immediate event has passed now, de-escalation becomes more probable supporting the risk on sentiment. The Hang Seng Index is up 3.2% in the opening today.

The dollar index remains steady at around 98 and the US 10 year yields are trading around 0.66%. The Euro scales new peaks and trades around 1.1130 which is its highest level since mid-April. This is on the back of optimism that the 500 bn Euro relief package will be greenlighted in the meeting due for tomorrow. Markets will continue to watch the political theatre around the social unrest and will also keenly wait for the NFP numbers due on Friday. It is expected that the unemployment rate might surge to 20% levels.

Taking the global cue, Indian markets have opened in the green. The Nifty index is up by 2.6% and the Indian rupee has opened strongly, currently dealing at 75.30 against the previous close of 75.61. The 10 year benchmark bond trades at 6.04.