Greetings,

“All is well” again in the global markets, with risk appetite returning as quickly as it dissipated late last year.

VIX is now at the lows we haven’t seen since the summer.

Source: barchart

Here is the Morgan Stanley’s Risk Demand Index.

Source: Morgan Stanley

Inflation expectations turned higher as the dollar rally stalled. Below we see TIPS (inflation-linked treasuries) outperforming regular treasuries since the FOMC announcement last week.

Source: Ycharts.com

Higher inflation expectations in theory result in easier monetary conditions by lowering real rates. The next chart shows the 5yr TIPS yield (effectively the 5-year real rate) moving lower.

A weaker trade-weighted US dollar correlates well (recently) with higher inflation expectations.

However, Morgan Stanley suggests that the easier financial conditions in the US are not likely to last and the dollar will soon resume its rally.

Source: Morgan Stanley

Here is how the risk appetite party could end.

Source: Reuters (3/21)

Let’s switch to the Eurozone where we have a few observations to cover.

1. Corporate debt sales in the area spike to record levels as demand for ECB-eligible paper rises.

Source: @fastFT

2. Rising Eurosystem balance sheet is likely to expand the so-called “Target2 imbalances” in which periphery national central banks owe money to the Eurosystem. On a consolidated basis, these cancel out because one of the largest assets on Bundesbank’s balance sheet is the loan to the Eurosystem. More on this later.

Source: ‏‏@Fmirw 

3. The German refugee crisis is proving expensive as the government works to absorb a couple of million people.

Source: @vexmark, @business

4. Speaking of government expenditures, here is the cost of pensions by country,

Source: ‏@jsblokland, @business

5. There are signs that the Eurozone economic growth has been improving. Industrial production has risen (first chart below) and the Eurozone GDP tracker shows higher growth in Q1 (second chart below) .