People don’t like things they don’t understand, and we like to have an explanation for everything that happens. The same holds true for financial markets. Not a day goes by that financial journalists do not provide a general narrative for what is going on. Here’s a random take for yesterday:
After the worst three months for global stocks in more than two years, the second quarter has started on the back foot as trade tensions fester and technology shares get slammed. The risk-off mood comes as investors prepare for earnings season. They still anticipate a strong showing, but will be watchful for any more signs of a slowdown in the synchronized global expansion (Bloomberg markets wrap)
I am much like them and watch financial markets intensively every single day. Two of my screens at work have no other function than showing me a collection of some 48 intraday Bloomberg charts depicting everything from global currencies to global stock markets, commodities, credit indices and interest rates. Other screens show me news headlines and yet more flickering numbers. And all day long I’m surrounded by people who do the same and chat about what they see. I find it truly fascinating to see how news can hit the market and what direction asset prices trend in.
Even more fascinating are trend breaks, i.e. the euro structurally weakened any time there was a reason for US interest rates to go up until mid-2017 (which makes sense from a basic economics point of view). Since then there has been a total trend reversal and now the initial response is often for the euro to strengthen. But I digress.
Based on what I see and hear, here are the five things that I think are currently really driving markets. Call it my H1 2018 market narrative, if you will.
#1 Markets are looking for signs of the next recession
Despite recent sell-offs, we are still in the middle of one of the longest historical bull runs for equity markets. Calling the top has been a fairly unsuccessful endeavour over the past years, but there is an overbearing sense amongst many that this cannot go on for much longer.
At the moment all the economic data is looking rosy (dare I say goldilocks). Add to that DT’s fiscal stimulus and the fact that stocks in places like Europe and emerging markets are still relatively cheap or at least not overvalued, should provide enough steam to keep things going.
But at some point it will end, and everyone involved in finance is looking for cues on when, what and how. That exacerbates asset price fluctuations. In many ways, all of the items that follow should be seen in that light.
#2 Donald Trump. Period
There was a brief period after the US election in 2016 when markets where enchanted by the new president as they rallied around the “Trump trade”. That was basically a result of markets rejoicing over his business credentials and expected tax cuts and pro market policies.
But today I read “this is now Trump’s market” in an entirely different tone. Whereas in 2017 his tax cuts and pro-business image helped to stimulate markets through some tough times (threatening the destruction of North Korea and Seoul was a blip on my screens), in 2018 that seems to have played out. At times, DT seems to turn outright hostile to the markets when talking about implementing tariffs on foes and allies alike, ripping up NAFTA and bashing Amazon to settle a personal feud. It is truly unsettling.
#3 Interest rates and inflation
Rising interest rates has been a narrative in the market for quite a while now. While this has typically been a worry associated with fixed income, early February was the time things really spilled over into the stock market. And not just a little bit, it was also the first moment in about two years time that markets truly started selling off.
At that time, a consumer prices report that showed a larger increase in prices than expected, which raised fears of fast and furious increases in interest rates. Higher interest rates will make stocks relatively less attractive than bonds, while hurting the profit margins of companies, hence the sell-off.
Lately interest rates have trended down slightly on general risk-off sentiment, but expect these worries to come back at the slightest hints of more inflation than previously expected. Speaking of inflation, tariffs can cause that..
#4 Wars and trade wars
The US President spent much of 2017 focusing on North Korea. Tweeting about fire and fury and destroying North Korea, all the while boasting about nuclear buttons does not make for a comfortable backdrop when investing into stocks or other assets. More recently, DT has fired several of his advisors and replaced them with hardliners, notably John Bolton (of George W Bush and Iraq war fame). That begs the question of whether Iran is now going to find itself in the crosshairs.
At the same time, Trump is talking about ripping up NAFTA and imposing technology and steel tariffs on the EU and China. So far the tit for tat has not been that detrimental to the real world, though it has hurt market sentiment. If it starts to show up in GDP figures, this becomes a whole different ball game.
#5 Technology and FAANG selloffs
In the more recent sell-offs, technology and particularly the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) got hard hit. And not only them, Twitter was down double digits during a single day last week and practically nothing in the sector got spared. In many ways, the worries about trade friction with China are what brought down the sector, but DT’s feud with Amazon and worries about Facebook’s privacy issues (with increasing scrutiny and regulation of the sector undoubtedly coming up) added to that.
Categories: Market views