MARKET VIEWS
We are getting a glimpse of the likely Q1 evolution here today in Europe. The confusion is that with a meaningful pullback in bond yields over the last month, the reflation trade has barely lost steam, and with better inflation/PMI prints over the last 2 days, it has restarted aggressively. The point is that there is a re-evaluation of value as a whole, so banks/autos/miners are now the same trade.
We would be long autos. The currency move is helpful, and until the tightening monetary conditions in the US hurt US growth, this is likely to continue to be the case. Valuations are still very low, and the difference between 4x PE and 6x PE is material for price without making stocks look expensive. This rationalisation is already playing out, and we would be quick to book profits should the mood change.
Against that we would be short airlines. They largely source in dollars and earn in EUR/GBP, so the currency moves are a headwind. On top of that the yield environment is not improving, and oil price tailwinds are abating.
Long banks. Valuations are not stretched and Draghi, along with all CBs now, is working to steepen the yield curve – he normally gets what he wants. Litigation slowly being resolved more favourably and Basel committee meeting delay helpful at the margin.
Short food and bev. Very good bounce given minimal move in yields and still poor earnings momentum. Yields should continue higher in the near term given the data, eventually that will weigh.
Long oils. With OPEC/non OPEC cuts coming at a time when most majors have cut costs to achieve oil breakeven at or below current levels. Part of those cost cuts has been rationalisation of exploration such that in the medium term supply will be tighter than it should be. Will be wary of the US as the marginal producer, but for now the trade has momentum.
MARKET GETTING AHEAD OF ITSELF?
Thursday • 10 November 2016 • 16:48
Yesterday was a truly amazing day. For the second time this year. But were the conclusions drawn correct?
The major takeaway for me from yesterday was that:
Firstly there is a lot of money on the sidelines and when it comes in secondly it attempts to do the same thing. That much was clear from yesterday’s price action. The conformity should worry everyone. Base and bulk commodities all +10% despite increase margin requirements from China. A 30bp move in the long end of the treasury curve and high single digit move in all European infrastructure stocks almost regardless of geographic exposure.
On the face of it Trump cutting taxes and increasing spending is bullish US stocks. But is it bullish European?
For a start, it is not clear exactly what this stimulus package will entail or is it clear how much internal support he will have to get it through.
His views towards China as a currency manipulator should worry everyone. As should his protectionist impulse. Following a mildly conciliatory speech yesterday the market now anticipates that the majority of his damaging promises during the election campaign will be diluted or discarded and the growth enhancing measures driven through. Is this right?
The market is getting ahead of itself. The commodity moves are not sustainable given that the rally had already begun eliciting supply responses and the effect from stimulus will not be realized in company numbers until 2018.
The most real impact we should be considering yesterday was the move in bonds. The Fed and low bond yields have been the support for the market over the last few years. The move yesterday was part reflection of inflationary hopes, part a reflection of the diminished power of the Fed going forward.
With that in mind does the VIX at 13.50 again look right?! The FED have been the suppressors of Vol. And a man who once body slammed Vince McMahon live on WrestleMania is in the White House.
From here we get to focus on OPEC, the Italian referendum (about which we should be very worried now), the Fed raising rates. On top of that we get to worry about a disorderly bond sell off and a strong dollar before we even learn about what Trumps policies might be. The market is expecting a year end rally – I would argue for the opposite as valuations compress.
WHY I THINK THIS MOVE IS WRONG
Wednesday • 21 September 2016 • 14:09
Some weird cross asset moves this morning. I can understand the relief from the banks that the depo rate wasn’t cut any further and that the curve is now being targeted, but should that be good for the rest of the market?
To start, this cannot be directly read into Europe since:
1) they would be targeting more than one 10 year and 2) there aren’t enough bonds with lower maturities to buy to take up the slack. That would necessitate tapering. And back door tapering could be what we get in Japan, since flat yields may actually necessitate selling.
When the dust settles I think we will end up realising that Japan hasn’t really done anything today, following inaction from the ECB last month.
That has been reflected in the Yen now higher than it was pre announcement, and the yield curve flatter. I can understand the initial relief of no rate cut, but risk assets are unlikely to push on from here, even with a dovish Fed. After tonight we get to focus on the fact that trump has closed the gap to virtually nothing and the data rolling over properly in the US.
MARKET THOUGHTS…
Friday • 09 September 2016 • 17:11
Numerous strategy pieces out over the last few days all obsessed with whether the cyclical rally vs defensives is over, or whether value should continue to be bought because bond yields are too low.
Today is an interesting development in the story; bond yields rising means defensives should be sold, and value/cyclicals are outperforming. But bond yields are not rising because of inflation expectations or data. The data as we all know from CESI has rolled hard. They are rallying because of Kuroda’s jawboning and the ECB inaction (Draghi does not like to disappoint, so this inaction is a reflection of a lack of support from the GC).
We are probably getting ahead of ourselves – we have seen plenty of these false starts before. But if this environment continues, its not a cyclicals vs defensives argument. Its just straight up negative.