President-elect Donald Trump’s YouTube release in which he outlined the policies he intends to implement within his first one hundred days in office surprised more by what he did not say than by what he did.
The headline-grabber was of course his announcement that, on day one, he will pull the US out of the Trans-Pacific Partnership process but as the agreement hasn’t been ratified by Congress, that’s no great shake. Apart from that, both Hillary Clinton and Bernie Sanders had promised to do the same, had they been elected, so there shouldn’t be much of an “Oops!” moment on the back of that.
His own “Drill, baby, drill” thing in which he spoke of easing legislation on shale energy and clean coal sounds better than it is and has had no impact at all on overnight oil trading, where prices pushed higher and WTI knocked on the door of US$49 per barrel and Brent traded close to US$50/bbl. Moreover, there was no mention of corporate tax amnesties, of NAFTA or of the Mexican wall. Hot air: 1, substance: 0.
The world is a very uncertain place at the moment and there are few indicators out there that might make investors believe that this is about to change. Two days to the Thanksgiving close-down and 10 days to the Italian constitutional referendum, which is not looking too clever for Prime Minister Matteo Renzi. A further 10 days on US rates rise.
And equities are rising into this? Of course they are. For the umpteenth time I have to repeat that the equity trade, with interest rates as low as they are, is the flight-to-quality move. As long as bond yields remain below dividend yields, they have nothing to commend them. I was talking to a chum yesterday, a bond hound with nearly (but not quite) as many years on his back as I do who was glowingly telling me how his clients were getting all excited about buying fixed income again. I find that hard to believe. US 10 years closed on December 31 2015 at 2.27%. They are now at 2.33%. In other words, there is not a 10-year bond which was bought this year which is above water. The credit spread situation isn’t quite as clear cut given the two bouts of extreme volatility in February and July but suffice to say that the iTraxx Main S26 closed just about at 81.00 yesterday which is around 2bp wider than its year-to-date average.
In other words, there will be more than enough fixed income funds that have seen their year’s performance blown away and that will be struggling to deliver a positive total return, come the end of the year. With Bund yields now at 30bp, give or take, and with the current 10-year sporting a zero coupon all it would take is a 3bp sell-down to wipe out the yield - there is no interest income - and for the total return to go negative. Why, I ask myself, would anybody in their right mind want to commit more capital than absolutely necessary to that market? That is unless of course one is pursuing some index-driven investment strategy in which capital preservation comes a distant second to beating a benchmark. No one stands in the middle of a railway track simply because they know trains have brakes…
Risk/reward in both the European and US government bond markets remains poor, albeit at 2.33% (at the time of writing) Treasuries have a lot more going for them, certainly compared to 10-year BTPs which, despite having been up and down like a whore’s proverbials, still only pay 2.04%. To what extent the Italian problem has dragged down the entire European government bond complex is not entirely clear but there is surely a head of steam building which risks blowing its top on Monday December 5. Whether the outcome of the referendum – and for argument’s sake let’s assume it’s going to be a “No” – is fully discounted by then or not, stock markets remain the safest place to park one’s money.
Back briefly to the oil price and market optimism heading into the OPEC meeting tasked with setting binding output caps. What’s that about repeating the same experiment again and again and expecting a different outcome? I rest my case.
The oil rally is, however, also helping to push bullish equity markets higher and new record closes were set for each of the Dow, the S&P, the Nasdaq and the Russell 2000, the first time since 1999 that all four have peaked simultaneously. It is possible that Trump’s failure to mention tax in his podcast, in which cleaning up the swamp took priority over fiscal lassitude, will be met with collective disappointment today. Despite the millions of words written about the reasons and justifications for the post-election rally, I still reckon that at the end of day the asset allocation trade from bonds to stocks has be, as simplistic as it may sound, the main driver and I can see no imminent reason to reverse the position.
Meanwhile, I was happy to read that the Greek government is forecasting GDP growth of 2.6% in 2017 as opposed to -0.6% this year. That would take it more or less back to 2004 levels but still a cool 24% below the debt-laden peak of 2008. All the while, the bailout auditors are arguing with the government about more and more missed objectives and Athens’ persistent failure to meet agreed targets for the reform of labour laws and the energy market. Those who are not at all surprised, say “Aye”. “Aye”
Somewhere, not a long way from the White House, they will be assembling the turkeys, one of which will tomorrow be pardoned by the president. What’s the betting that the one that escapes the butcher’s knife will be called Hillary and not Donald?