I have a lot of sympathy for pen-wielding strategists at the moment. Every day the empty white sheet of digital paper is staring at them, the little cursor tauntingly flickering in the top-left corner. The most obvious course of action, to copy-paste their previous note, is just about the only thing they can’t do. We economists at least have a steady flow of new data, however mundane and useless, to write about. In other words, the main questions remain the same, and they remain largely unanswered. Economic activity has collapsed, and is now staging what appears to be a painfully slow rebound. Even in the best of worlds, however, it’s difficult to escape the notion that significant damage has been wrought in on both the demand and supply-side. This puts equities on the spot. A reflexive rebound from the nadir in March was always coming, but could it be sustained, and would we re-test the lows? In a normal recession the answer to those questions would be “no” and “yes”, but there is nothing normal about this recession. U.S. equities have roared higher, and the ubiquitous growth stocks, which outperformed before, are leading the charge again. The S&P 500 growth index is up a cool 32% from its March lows, and is now flat year-to-date. By contrast, the S&P value index is up “just” 21% from the lows, and are still carrying a 20% loss year-to-date.
Read MoreMy pre-holiday missive that FX volatility is making a comeback. Mr. Trump’s threat to slam tariffs on Chinese consumer goods earlier this month prompted the PBoC to step back and “allow” USDCNY to breach 7.0. This, in turn, drove the U.S. to label China as a currency manipulator. Markets now have to consider that the trade war are morphing into currency wars. This is significant for two reasons. First, it confirms what most punters already knew; the CNY is inclined to go lower if left alone by the PBoC. Secondly, it has brought us one step closer to the revelation of how far Mr. Trump is willing to go. The problem for the U.S. president is simple. He can bully his main trading partners with tariffs, “winning” the trade wars, but he is losing the currency wars in so far as goes as his desire for a weaker dollar. The veiled threat to print dollars and buy RMB assets, as part of the move to identify China as a manipulator, is a loose threat. Just to make it clear; it would involve the Fed printing dollars and buying Chinese government debt and/or stakes in SOEs, which would probably be politically contentious. Moreover, the PBoC could respond in kind; in fact, it probably would.
Read MoreIt’s easy to trip over trying to formulate a market narrative at the moment. One interpretation of the dramatic decline in global bond yields is that the smart money is de-risking their portfolios ahead of global slowdown and a rout in equities and credit. The ramp-up in the global trade wars, and still-soggy economic data seem to confirm this version of the narrative, but it is also a somewhat naive story. The global economy is not in perfect shape, but it is hardly on the brink of a recession, especially not since it is usually coordinated tightening by central banks that push the major economies over the edge in the first place. The market is now pricing-in one-to-two rate cuts by the Fed this year, and three in 2020. The money market curve in the Eurozone is even starting to price in the idea that the ECB will further scythe its deposit rate below -0.4%. The argument in the U.S. is particularly delicious. Last year, the consensus was angling for a recession in 2020 based on the idea that the Fed was in search for a “neutral” FF rate at about 3%. Now that the Fed has thrown in the towel, the idea is that it will cut rates to prevent the recession that it itself was supposed to have sown the seeds for in the first place, by hiking interest rates.
Read MoreThe Q1 earnings numbers have kicked up a lot of dust across sectors and individual companies, which is good news for stock-pickers eager to prove their worth. For markets as a whole, though, I see little change in the underlying narrative relative to what I have been talking about recently. Equity investors remain focused on what policymakers are saying rather than what they’re doing, sticking with the idea that central banks, and perhaps even politicians at large, have their backs. Bond markets are nodding in agreement. Solid labour market data in the U.S., and a robust Q1 GDP print, have not dented market-implied expectations that the next move by the Fed will be a cut. And in the Eurozone, markets have priced out an adjustment in the deposit rate through 2021. Blackrock’s Rick Rieder summed it up neatly last week by referring to the asymmetric outlook for policy. I am paraphrasing, but the idea goes something like this: “If central banks raise rates, they will do so slowly and hesitantly. If they have to cut, due to tightening financial conditions and a slowing economy, they will do so fast and aggressively.” I would even wrap in fiscal policy here, though this admittedly tends to operate more slowly, and over a longer timeframe than monetary policy.
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