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Blain: "The List Of Market Threats Is Significant"

Via Mint Partners’ Bill Blain,

“As long as there are sex and drugs, I can probably do without the rock and roll..”

Its’ likely to be a thin and jittery week ahead of the Easter Break. Investors are weary after the last 2 months of bumpy but inconclusive markets. Stocks may have lost $3 trillion last week, but while markets look fractious, neither bonds or equities have broken out. The big picture remains positive – synchronous global growth, financial normalisation, and abundant macro risk-on signals.

However, there are cracks appearing at the company level, and the gap between reality and what investors chose to believe – sentiment – is widening with a negative bias.

The negative sentiment is most obvious on the Fear and Greed indices – which all say investors fear the worst.

Lower highs and higher vol is not a positive picture. That said, we did we a significant amount of bottom fishing US stocks late last week. My stock picking guru, Steve Previs, suspects we’re still in for further correction.

There is plenty to worry about and the list of market threats is significant:

Trade War? Trumps section 301 versus China gets the blame for the current weakness. However, its less nailed on than you think. Despite the bellicosity, we now know China and the US are talking behind the scenes. We’ve got a couple of months negotations with the likelihood of a trade compromise that sees China open up, and Trump get something to crow about. It will be interesting to see how Trump’s China hand plays out – and what it means when Trump shifts focus to take on Europe and other recalcitrants. The point to panic will be China putting tariffs on Soyabeans or cancelling Boeing orders.. at that point escalation looks most likely.

Inflation? Yes – its happening in terms of wages.

Commodities? Oil rises look sustained – and open a number of opportunities. The potential effect on growth, however, could be significant.

Europe? There are the predictable column inches in the papers about what a danger to European unity Italy is, or how France’s Macron Miracle is going to come apart. Both are probably overblown. 

Japan? The Morimoto property scandal sweeping the Abe government could potentially trigger the end of the Abe era if his popularity continues to crash

However, the micro cracks in the market – such as what happened to Facebook over the last few days – are very worrying. While we’ve been looking for something fundamental to break on the macro-side, perhaps the devil is in the micro detail? Facebook’s travails re Cambridge Analytica and subsequent stock tumble were a proper no-see-um moment. A good number of market comments this morning focus on the increased likelihood of new regulation to protect consumers across the Tech sector – that could be a real chain on further stock market upside!

This morning I’ve been reading a very interesting report on MasterInvestor – “Twilight of the Zombies.” It predicts a coming spike in corporate defaults – following the likes of Carillion and ToysRUs. Rising interest rates (and the fact they may still rise faster than expected) and high corporate leverage is going to trigger a new default cycle: banks incurring loan losses, hiking corporate lending rates.

It’s a vicious cycle: rates rise, defaults increase, rates rise further… Its worth checking the bond portfolio and shaking out some of the weaker names before events catch up!

Back to the day job!

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The Morning Porridge is unrestricted market commentary freely available to all investors on an unsolicited basis. It is not investment research.

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