The new week opens with much of Europe closed for the Whit Monday holiday, with the aftermath of Borough Market attacks, the cutting of diplomatic ties between a number of Arab nations and Qatar, and of course Friday’s US payroll report to deal with.
Not since the Bishopsgate bomb of 1993 has terrorism come so close to the City as it did on Saturday night but, that said, the IRA had specifically targeted the City. The events of Saturday were geographically close to London’s financial centre but more due to circumstance than by design. Opposite Borough Market is London Bridge station, one of the key commuter terminals, although we understand the cordons have been lifted around the area.
Oil opens a tad higher this morning, supposedly on the back of the breakdown of diplomatic relations between Qatar and the four Arab States of Saudi Arabia, Egypt, Bahrain and the UAE after the emir is reported to have admitted to supporting both al Qaeda and Daesh. There is a long history of Arabs arguing with each other very publically but these spats tend to be fairly short lived and they usually blow over before long; the mutual dependency in the Opec space eventually takes precedence, which surely explains why the oil market reaction is so muted.
Having closed on Friday around US$47.70 per barrel, it opens today around US$48.25. As this move is clearly easily within the range of normal daily price volatility, it doesn’t really count as relevant and in a week or so the overnight jump most probably won’t even stand out as anything special on the technical charts.
JOBS
That brings us back to the Friday US payroll report. After Monday’s strong ADP report, indications had been for a really strong nonfarm payroll, well ahead of the consensus forecast of a 182,000 increase in employment. In the event, the reported change in the payroll was a disappointing 138,000 to which was added a sharp downward revision in the April number to 174,000 from 211,000. All components were softer than hoped for including the more carefully watched participation rate, which fell to 62.7% from 62.9%. The only “good” news was to be found in the actual unemployment rate, which fell to 4.3% , the lowest reading since just before the implosion of the dotcom bubble in January 2001 and below the level achieved during the debt-fuelled economic boom ahead of the global financial crisis.
With this figure in hand there are already growing calls for the Fed to be less hawkish – what’s hawkish about increasing the Funds rate by 25bp to 1.25% 18 months after the tightening cycle supposedly began and with CPI at 2.2% escapes me – although this is not news given recent pacifying comments by the uber-dove Lael Brainard. The battle for the heart and soul of monetary policy goes on.
In the aftermath of the not-as-firm-as-expected employment report, both bonds and equities were off to the races again on Friday with all three key US indices putting in back-to-back record highs. Just for the record, the Russell 2000 didn’t quite make it but at 1,405.387 points it closed above 1,400 for only the fifth time in its history and only just over 15 points below its all-time high of April 26. On the other side of the asset spectrum, the 10-year Treasury yield fell in intra-day trading to 2.14% - we read 2.17% at the time of writing – the lowest since the big post-election moves in early November.
So bonds are rallying and along with equities, a phenomenon which always perplexes both strategists and investors. Even or maybe especially after five or so years of the rather childish usage of “risk on, risk off” to describe day-to-day market sentiment – I’d love to thump the idiot who gave us this rather teenage terminology – there is no way of accounting for two asset classes at opposite ends of the risk scale to be moving in unison. Squaring that circle remains as elusive as the unifying theory that would bring Newtonian physics into line with quantum theory where both work perfectly and unequivocally when standing alone but which cannot be brought to work together.
As a believer that should the Fed have intentions of shedding balance sheet in anything more than in nominal size it risks seriously disrupting the bond markets, I’d be tempted to argue that the market is beginning to come to the same conclusion and that therefore fear of long-end exposure is being priced out again. Other than that, I can see no reason for the dramatic and ongoing flattening of the yield curve although, to my own credit and as external adviser to the asset allocation committee of a UK-based investment manager, I had a while back already advocated re-establishing a long duration bias in the fixed income portfolios.
POLLS
And so finally to the event of the week, the UK parliamentary elections, a subject I have strenuously avoided for most of the campaign period. It appears that Prime Minister Theresa May has been shrinking in stature at about the same rate as the opposition leader Jeremy Corbyn has been gaining. When the election was called, May had a 23 point lead in the polls; as at this morning and depending who one listens to, it has shrunk to something in the region of four points. It would be wrong to say to say that the election is too close to call but bets on a hung parliament are increasing and with nobody wanting to go into coalition with the SNP, and the Liberals most likely to remain too weak to help form a majority coalition which, with their one-way anti-Brexit stance is of no use to either side, markets are stuck not knowing which way to jump.
I spoke to an active private investor on Saturday who confirmed that he has not cashed out ahead of the elections. Again for the record, the FTSE closed Friday on the nose of its previous all-time high of 7,547.63 from May 26 and opened today to a new record high of 7,559.90. No sign of nerves in the financial markets then? Apparently not. Whether this is the dual effect of increasing volumes of index/ETF trading combined with powerful algorithmic arbitrage players is a moot point but it does point to increased volatility in the event of a sell-off, should Thursday spring a surprise outcome.
Steady nerves required this week along with the knowledge that nobody has ever been fired for being long in a falling market but it is terminal to get caught short in a rising one.
Have a good week.