Three main factors started to move in the opposite direction of the past few months and may have questioned the validity of the investment framework generally adopted by the investment community. Bond yields in Europe rebounded significantly (from less than 10bps to more than 50bps for Bunds), the euro strengthened against the dollar (from a low of 1.03 to 1.13) and the oil price gained almost 50% from the trough (from $45 to almost $70 for a barrel of Brent). Financial markets have a tendency to overshoot, and it is probable that for the dollar, the oil price and European bond yields, things had moved too much too fast. However, it seems premature to think that we are returning very quickly to the old regime (oil price above $100, and euro above 1.3). What triggered the oil price drop in the second half of last year was a change of paradigm: the US becoming the swing producer with the ability to quickly adjust up or down their production around the cash break even cost, estimated by industry specialists to be around $70 (i.e. more or less the current level for spot prices).
The coming months will test that theory. European quantitative easing (QE) has just started and the Federal Reserve (Fed) seems to be on course to raise rates in September. This should continue to prop up the dollar. If Yellen's decision is primarily based on wage inflation, this seems a safe bet. If she relies on a broader view of the economy, then the outcome is not so sure as the US economy has been sending mixed signals recently. Europe continues to recover, but the boost provided by the dollar and the oil price may not be as big as we could have wished a few weeks ago. Then, there is the Greek saga. I believe that the most likely outcome is an agreement where Tsipras goes 80% of the way and the Eurogroup meets him at this point with a bit of leniency. However the hot heads in power in Athens may prove me completely wrong. Even in the case of an accident, I would not think that there would be much collateral damage for the rest of the eurozone, including the periphery. The tiny weight of the Greek economy, the recovery now clearly gathering strength in Spain and in Italy and Draghi's wall of money should conspire to make the risks very limited.