“Stubbornness does have its helpful features. You always know what you're going to be thinking tomorrow.” Glen Beaman
Its Own World
The stubbornly robust US stock market continues to go much higher, given low interest rates and increased global liquidity. It may be even harder to imagine that volatility is very tame, despite political twists and turns, macro concerns, and an unconvincing growth environment. The overly anticipated trend reversal is that stocks have not materialized and the bull market is about to turn eight years old. Since the March 2009 extreme lows, the S&P 500 index has mustered over a 250% return. Basically, a smooth-sailing appreciation in stocks appears quite disconnected from “ground” level sentiment that’s causing daily political uproar and middle class dissatisfaction. At times the financial markets seem like it lives in a world of its own.
To claim this stock rally was fueled by Obama’s policies or Trump’s post-election optimism may not tell the complete story. Markets have not overly cared about theatrical and contentious politics thus far. It’s true, during the Obama post-crisis era, Quantitative Easing policies materialized in an aggressive manner but hardly stimulated the real economy. And yes, the Trump rally was driven by investors who looked ahead to fiscal changes, lower taxes and lower regulation. Now, with the promised fiscal reforms requiring additional time and clarity, investors are not sure what to digest or how to act, except for sticking with status-quo.
“There is a Republican tax-cut plan, an existing one crafted by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady. But it is splitting Senate and House Republicans, as well as the business community it is designed to help. Nobody is quite sure what the White House position is, or when it will become clear. And the whole process is being slowed down by the struggle over whether and how to repeal the Affordable Care Act, which itself is bogged down in uncertainty.” (Wall Street Journal, February 20, 2017)
Further delays to the execution of fiscal policies appear to continue political civil war, Congressional tactics and challenges to progress in the public sectors. What has shifted is the lack of faith in Central Banks and establishment politicians – those visible points cannot be dismissed. Clearly, Trump and Brexit trends demonstrated these revolt-like responses. Yet, for investors spats between political parties or gloom and doom statements from high-profile money managers are not going to share their thinking.
Rate Focused
However, when push comes to shove, the financial markets remain overly focused on interest rates and the consequences of low rates, which leads investors to desperately seek yields. This combination promotes higher stock prices and further risk taking. Amazingly, quantifying the ongoing risks is not easy until the damage is done and, of course, timing the chaos requires a mixture of luck and randomness. In other words, the various concerns boil down to global growth. From China to Europe to US, what’s the fundamental driver of growth across industries? Not to mention, the protectionism wave raises even further questions on global growth. These developments do not exude tons of confidence. If there were notable signs of US growth, then the US 10-year yields would be moving higher and Yellen would not be hesitant to raise rates. Amazingly, the Federal Reserve has been hesitant to hike and lacks solid evidence of a heating economy. Economic strength today is still murky.
Hints of Unease
The constant liquidity provided by central banks floods the market with more cash, which puts pressure on yields, encourages more risk taking and boosts share prices of most stocks. Inherently, this effect is as obvious as it seems; from ECB to BOJ, the low rate policies are in effect. In the US, inflation expectations and economic growth numbers are mixed. Can Yellen raise rates in a justified manner?
The known concerns in Europe are well-documented, the uncertainties are much discussed, but the outcome of the theatrics remains a constant unknown. This can be seen from Brexit implementation to potential “Grexit” to the rapid demand for Nationalism that’s brewing on the ground level. The political crisis across the Eurozone has not derailed or altered the path of stock markets, for now. The fallout or gains from Brexit are grossly misunderstood and negotiation with Greece is an ongoing matter of deferring the not pretty reality. Either way, major changes aren’t easy to adjust to. Plus, elections in France and Germany can spark further changes that can test the fortitude of an optimist.
Sluggish Macro
Since the post-Trump victory rally, there is some mild pause and ongoing sideways action in interest rates, oil, gold prices and dollar index. Although, US stocks have roared in a dramatic fashion, the commodity and currency trends are lackluster or nearly trendless. From supply-demand dynamics in Crude to some EM currencies attempting a recovery, the participants hint of waiting before overeating. The inverse relationship between US stocks and EM-Commodities is worth tracking. Not all assets are as cheerful as the broad US indexes (S&P 500, Dow Jones and Nasdaq) along with a strong US Dollar. A theme that’s not new, but vividly stands out even more in a less certain world.
Article Quotes
Europe-China Conflict:
“Brussels is investigating a showcase Chinese rail project that aims to extend Beijing’s ‘One Belt, One Road’ initiative into the heart of Europe, potentially putting the European Commission at loggerheads with China. …Any legal setback to China’s first railway project in Europe would be a diplomatic embarrassment for Beijing, which made the railway its cornerstone offering to win support from central and eastern European nations during a summit attended by the countries in 2013. At issue for the commission are separate agreements signed by the Hungarian and Serbian authorities. But the main focus is on Hungary, an EU member state that is subject to the full rigour of European procurement law. As a prospective member of the bloc, Serbia is subject to looser rules. Failure to comply with EU tender laws may be punished by fines and proceedings to reverse infringements. ‘If push comes to shove and if it turns out that the Hungarians have awarded a public works contract of a particular dimension without tender they will of course have infringed EU legislation,’ said a senior EU official.” (Financial Times, February 20, 2017)
Potential Turn:
“It is not unlikely that interest rate differentials may widen to new extremes before they reverse. This is because political uncertainty surrounding fiscal policy means uncertainty about how monetary policy may respond. Still, there is a limit or floor on how low or high interest rates can go before they become more permanently damaging to the financial system. Markets have taken a view that eventually the Fed will face a “ceiling” on U.S. short-term nominal interest rates, especially in the wake of excessive fiscal policy that may overheat the economy and cause a recession. In Europe, markets have expressed their opinion that negative rates can’t go on forever, and therefore the amount of negative yielding bonds has fallen from more than $10 trillion to less than $5 trillion, according to recent J.P. Morgan research estimates.” (Bloomberg, February 17, 2017)
Key Levels: (Prices as of Close: February 17, 2017)
S&P 500 Index [2,316.10] – From June 27, 2016 lows (1991.68) to February 16 highs (2351.31), the index is up 18%.
Crude (Spot) [$53.40] – Nearly three months of sideways patter. The current $50-54 range remains familiar for both buyers and sellers. A directional catalyst is needed to tilt the neutral behavior.
Gold [$1,228.30] – After bottoming in mid-December, Gold prices are mildly suggesting the ability to hold around and above $1,200. Yet, confirmation is needed if Gold prices are stabilizing.
DXY – US Dollar Index [100.80] – Nearly four months of DXY staying above 100 suggests that King Dollar is still a major theme, but there has been no major reacceleration since November. The January 3rd peak of 103.82 is worth tracking if that marked a meaningful top. For now, it remains mostly neutral and reaffirms the existing trend.
US 10 Year Treasury Yields [2.41%] – For about five years, 10-year yields have hovered under 3% and mostly above 1.50%. The multi-decade downtrend is still intact despite some occasional spurts.
Dear Readers:
The positions and strategies discussed on MarketTakers are offered for entertainment purposes only, and they are in no way intended to serve as personal investing advice. Readers should not make any investment decisions without first conducting their own, thorough due diligence. Readers should assume that the editor holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in any Publish Post, considered liable for the future investment performance of any securities or strategies discussed.
No comments:
Post a Comment