Market Outlook | May 4, 2015

“He who is not everyday conquering some fear has not learned the secret of life.” Ralph Waldo Emerson (1803-1882)


Big Picture Landscape

In the last few weeks, the US Dollar run has cooled a bit, and the Crude demise has recovered a bit; unlike in prior months, but the lull seems short-lived. The economic picture is stuck in a rut for most, while participants desperately search for answers. Similar to investable assets, which have been scarce for many years, finding growth stories is equally difficult. Sellers or profit takers have hesitated in last few months, but sensitivity towards negative headlines is picking up. With the market's obsession with central banks, the market-moving event is driven around a perception of trust. For now, markets have not relinquished full trust in the Fed’s leadership. The trust in the Fed’s policies seems to supersede the brewing and familiar macro worries not only in the US, but globally, as well.

Discovery & Realization

The attention is shifting from the well established magic of QE to the actual day-to-day impact of growth expectations. Corporate earnings season or GDP data are showcasing either mixed or softer results:

“The Fed’s two-day policy meeting concluded a few hours after the Commerce Department reported that gross domestic product, the broadest measure of economic output, grew at a 0.2% annual rate in the first quarter. That followed advances of 2.2% in the fourth quarter and 5% in the third.” (Wall Street Journal, April 29, 2015)

This naturally begs the questions regarding the re-acceleration of the US economy. The clarity of the economy's direction hinges on many absent data points, so the mystery and fuzziness continues. April’s jobs numbers raise the suspense of those investors seeking to reach a conclusion for a directional bet in stocks and bonds.

Major headlines are not necessarily needed as a major catalyst thus far, but fatigue is kicking in for this aging bull market. Frankly, this can irritate investors. It is a test of patience that keeps reoccurring in this neutral market, which contains subdued volatility. In fact, with more mixed data, the neutral behavior lingers on as the broad indexes are trading in a narrow range.

The discussions within financial circles revolve around interest rates and the potential for a hike. Surely, this has been talked about with a fuzzy timetable even among the so called 'experts.' If the economy is not growing rapidly in terms of wages and commodity demand, then why should the fed raise rates? If inflation (measured by traditional method) is not rising, then how is there further growth? It’s becoming clear that inflation is not as troublesome as many expected. Of course, how inflation is measured is an all out debate that will continue. Yet, the inflation mystery lacks solid clues to spark a reaction in the bond markets.

Preparation

These days there is no shortage of warnings of market risk. Last year, the dollar strength, at the expense of Emerging Market currencies, was clear. Weakness in commodities with expanding supply was a powerful reminder of the business cycle, as well. A few tech based companies' (Twitter and Linked-In) earnings last week showcased a slowdown in momentum. Yet, on a very simplistic level, broad indexes are trading at or near elevated valuation. Thus, warning about a coming collapse in stocks in not breaking news or a novelty at this stage. Similarly, dealing with unclear or mixed data is challenging for most, and forcing markets to favor the status quo of low rates and higher stocks also brings challenges.

The reliance on central banks is stronger today because the low rates, low volatility, and high equity prices are convincing to mass participants. As the Fed continues to publicly communicate (while testing the waters), clear language is not something to reasonably expect. In fact, the Fed is too artistic with words, and risk takers are left with only a gut feel. Thus, with all the unknowns brewing at this junction, it is fair to say that in a game where no one knows, it surely comes down to gut. After all, this is a speculative game for market participants. Anxiousness is immeasurable, but enough mild warnings have been signaled.


Article Quotes:


“Suddenly, such trends have gone into reverse. Euro zone equities in April notched up their first monthly loss of the year. German 10-year Bund yields, which had been flirting near negative territory, this week climbed more than 20 basis points to 0.37 per cent — an unusually large jump. The euro rose 4 per cent to $1.12 against the dollar. It seemed Mario Draghi, ECB president, may have lost his magic touch. Reassuringly for the ECB, analysts and market experts are not yet calling the end of QE rallies. Instead, a host of technical factors were blamed for this week’s upsets, including overhyped trades and market distortions. The bad news is that the volatility could be a harbinger of bigger traumas to come. What happened ‘is very telling of what investors will have to live through in the coming two or three years’, warns Pascal Duval, European chief executive at Russell Investments. The easiest explanation to dismiss is that markets reacted because QE had served its purpose in pumping up economic growth. Eurozone inflation data this week suggested Mr Draghi had averted a deflationary slump — which, at least according to economic textbooks, might have pushed bond yields and the euro higher. But the euro’s rise — which will hit exporters’ prospects — was triggered largely by much weaker than expected first-quarter US economic growth figures. Eurozone share price falls also fitted with a gloomier global economic outlook, especially with Chinese growth slowing, and expectations about future eurozone inflation rates remain modest.” (Financial Times, May 1, 2015)

“Chinese monetary policy was excessively tight in 2014 but started loosening in late 2014, in an attempt to cushion growth, facilitate rebalancing, support reform and mitigate financial risk. There are three main reasons for this policy shift. First, there is evidence that the Chinese economy has been operating below its potential capacity. Second, among the big five economies, China’s monetary policy stance and broader financial condition both tightened the most in the wake of the global financial crisis, likely weighing on domestic growth. Third, a mix of easy monetary policy and neutral fiscal policy would serve China best at the current juncture, because it would support domestic demand and help with the restructuring of China's local government debts, while facilitating a move away from the soft dollar peg.” (Bruegel, April 29, 2015)


Key Levels: (Prices as of Close: May 1, 2015)

S&P 500 Index [2108.29] – As witnessed earlier this year in February and March, the index is losing steam above 2100. Selling pressure has been building mildly as a follow-through is awaited.

Crude (Spot) [$59.15] – From March 18, 2015 the recovery run continues. This multi-week run is surprising to some, as a form of stabilization is taking place.

Gold [$1,180.25] – For the last few weeks, gold elevating above $1,200 has been a clear struggle. A catalyst for a momentum is not visible.

DXY – US Dollar Index [96.92] – Near-term pause after a multi-month surge. Since Mid March, the uptrend has shifted with mild reversal from multi-year highs.

US 10 Year Treasury Yields [2.11%] – Trading is at familiar ranges again between 1.80-2.20%. Breaking above 2.20% would trigger a reasonable response; however, the last two attempts have failed to hold above 2.20%.





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