“Just do the right thing – whatever it might be…”
In the headlines this morning…
I’ve attached a photo illustrating just what a fantastic weekend it was – but sailing under bright sunny skies wearing a summer jacket in February is freakishly weird. I suppose we should thank Donald Trump and the rest of the climate change deniers, but I dread how we will collectively pay any eventual bill for breaking the planet.
Meanwhile, “She-who-is-now-Mrs-Blain” is very Welsh (her first language), and was suffering something terrible on Sunday after Cymru whipped England. My support for Wales in our local pub might have “strained” some friendships – suggesting where the English can stick that proverbial chariot might have been a tad impolitic.
(Sadly, the joys of the weekend are put into perspective the misery of getting to work on a Monday morning. A frantic scrabble for seats on the train up from Southampton, a red-light delay getting into Waterloo, and then walking to the City because the queue for the Drain is miles long and the Jubilee line is worse.)
Back on Planet Market, the big news is Trump postponing his threatened March 1 tariff hike on Chinese goods. Trade war threats are not over yet – there is still plenty of aggravation on the Tech side and for Huawai in particular – but the Chinese market went stellar on the news. As yet, there is no trade agreement – just Trump being magnanimous! Yet markets are partying..
A number of clients have pointed out the increasing number of disconnects they see between the economic data and what they see in markets. While data continues to disappoint to the downside, the markets seem quite glib to accept more risk – the rise in stocks since the December bottom highlights we’re back into “Risk On” environment. Thus, we have stronger stocks but a worsening economic picture – which is somewhat illogical. Despite the uncertainty on growth and a rising number of negative estimates, markets seem happy to discount these fears. Bond markets are very strong, confirming an expectation of lower rates for longer!
In terms of volatility, all the fear indicators have retreated – VIX has straight-lined down from 35 to 14, strongly suggesting everyone is sleeping sounder at night. After a decent US earning seasons – spiced with enough downside surprises to make sure everyone remains just a little uncomfortable – US stocks have staged a pretty decent rally back from the Dec lows. Not quite record breaking, and perhaps a tad complacent, but demonstrating investors still have faith in… something? That ongoing cheap money will keep corporates in buy-back mode? Or that returns from stocks are still likely to outperform bonds in the era of free money? Or just a lack of imagination and FOMO (fear of missing out.)
I’m unconvinced the risk is out the market. Maybe the picture is just a little cloudy?
I’m wondering if markets are something like “shell-shocked” and beginning to ignore some of the realities? At the core is the uncertainty re global trade and growth. Naturally any investor will be concerned if the sudden imposition of trade tariffs is going to dramatically reduce global trade volumes. But we’ve now got experience of the Donald Trump approach to trade – it’s not a strategic approach, but a series of tactical small individual agreements before moving to the next “negotiation”. Last night was just another example..
Markets now perceive a clear pattern to Trump’s approach to Trade Negotiations: He threatens to take us to the wire but never actually pulls the trigger. That has two effects: 1) the damage to sentiment is inflicted by the initial threat (which tends to quickly show up in sentiment and order data), and 2) the threat isn’t carried out leaving upside potential. The result is markets are ignoring the early signals (ie pulled factory orders) and focusing on the likely non-tariff agreement upside which Trump then claims as his trade victory.