Submitted by Bill Blain of Mint Partners
Mint – Blain’s Morning Porridge – 27th March 2018
“You don’t need a weather man to know which way the wind blows…”
The headlines are all about yesterday’s “extraordinary” bear-rally in stocks – upside buoyed by expectations the US/China trade discussions will de-escalate trade war tensions. I’m unconvinced by the narrative: the volume was tiny and a look at the charts suggests global stocks have still got problems ahead.
And, the trade talks are not a done deal – I’m not so sure Trump’s poker game versus the Chinese will playout as positively as he expects. What happens if the Chinese say No and stop buying Treasuries? Yesterday’s US 2-yr auction gave us a near 2.31% yield – the highest level since the Global Financial Crisis (and this US funding round is the largest ever!), and primary dealers were left very long. 10-yr is still bouncing around 2.85% – but the US has $1 trillion to raise this year and the Fed is tightening, while the dollar is looking tarnished. Credit spreads continue to look soft. It all feels a little like a pre-quarter end holiday market – which it is!
Interesting argument with a client yesterday about economic data – he was complaining we don’t spend enough time looking at what the data is really telling us. That’s a very fair comment – I used to write in detail on the composition of CPI, employment and Growth estimates, and today I hardly do. Why? Good question – I’m spoiled by access to top Macro analysts like Martin Malone who do that hard thinking for me. (If you want to take a look at Martin’s Alphabook Macro product – get in touch!)
Martin’s been deep diving past the news flow on China and looking at the facts – positive trade deals are getting done in terms of NAFTA upgrades set to deliver hug upside to the USA. A new South Korea agreement is also in the works. He reckons a plus 50% probability of successful China negotiations and new Trans Pacific TPP agreement is on the cards. Nothing to worry about then – stick to risk assets!
The dollar’s weakness – and the fact the Trump administration thinks that’s just peachy – is a major factor in current markets. Everyone is trying to understand why the dollar weakness, and looking under every rock and behind each bush for the reasons. It’s hidden in plain sight – there is no reason to think the dollar will turn round imminently: a strong greenback would be kiss of death for Trump’s appeal to his voter base. Why would he reign it back?
One of the big issues is the corollary to dollar weakness – Euro strength. Just how solid is the basis for Euro strength? European growth is better than it’s been – but its still sub-optimal. To the south of the Paris-Berlin axis its unbalanced and leaving a long term festering youth unemployment issue. The end is in sight for Negative European Interest rates and the ECB’s QE programmes – yesterday Bundesbank hawk Weidemann was commenting about higher rates next year and need to get on with it, noting; “the current upswing won’t last forever.” Rising European rates may be a Euro positive, but they will only escalate the tensions across Europe in terms of populism, politics and economies wanting to spend their way out of crisis.
So…. it was interesting we had IMF head Christine Lagarde commenting on European Union yesterday. She pretty much followed the Macron Line – delivering the outline French plan for Europe – a unified financial market, even saying capital markets and banking union could be enacted quite quickly. Her inclusion of a rainy day fund is “interesting” and challenging.
While Merkel has been forced to buy into Macron’s vision of a new post Brexit Europea to garner SPD support for her own rickety coalition, Germans aren’t historically keen on anything that sounds like a hand-out to weaker states. And Dutch and Scandinavian support for the in-depth but potentially costly Macron plan, with the much closer integration that would be required under Brussels is not a given. While I’m sure the Macron European blueprint is thorough, is the rest of Europe ready for the new Sun-King’s vision? Not convinced.