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Tuesday, 17 October 2017

Fat, excitable summer markets or a rally without legs

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There are days when bond and credit markets feel as though they are fat, cynical, lasagna-chomping Garfield to equity markets’ panting and excitable Odie the dog. Equities found their bottom on June 23rd when the S&P traded to an intraday low of 1,262.87 points. By last Friday, July 1st, it was back to touch an intraday high of 1,341.01 which represents a bottom to top of 6.19%. To rally six percent in six sessions takes something special.

Thirty years in the markets have taught me that, by and large, what equity geeks know and understand about macro economics can be fitted on the back of a postage stamp, still leaving room for the complete works of William Shakespeare. So they rallied stocks to the moon and credit indices seemingly reluctantly followed the madding crowd. However, not all was well in the valley. We had nothing but sellers. The street wanted to sell and retail wanted to sell too.

Anthony Peters, SwissInvest Strategist

Anthony Peters, SwissInvest Strategist

The street is already drawing up the shutters for the summer recess, or at least it is in Europe. It might be July 4th today – the transatlantic cousins will be busily playing with the barbecue and turning their best beef into charcoal while drinking stuff which very nearly challenges the trade descriptions act by labelling itself as “beer”. It signals the official beginning of the summer break which now lasts until Labor Day on the first Monday in September although Wall Street will not properly close down until that very last week of August and maybe the first week in September (Labor Day falls on September 5th this year). However, reducing risk for the summer slowdown is already the prime excuse for the bids to be as flaky as as a teenager’s dandruff.

A RALLY WITHOUT LEGS

This belies the rally. A rally which just about everybody wants to sell into is likely going to prove to have had pretty short legs. True, the Greek parliament did everything it was told to in order to secure its next round of funding, and over the weekend the Eurozone partners finally got out the cheque book and signed it bottom right – just below the bit that said €17.4bn. But we have spent the past three months agreeing that, bailout or no bailout, Greece is ueber-bankrupt. We all said that signing off the final payment of the first bailout and underwriting the second would alter nothing as far as Greece’s overall financial position is concerned. We, the debt guys, all saw the smoke and the mirrors but equity markets didn’t give a toss and bought anything in sight. The bold motto: “If it moves, buy it and if it doesn’t move, buy it till it does….” is being applied again without hindrance.

This perplexes simple minds in debt and credit markets and the forex guys are left to go with the flow. Most firms I know – be that real money, hedge funds or dealers – have been sitting on trapped longs through the recent crisis, hence they want to use the window of opportunity to get out. I can’t see a clear probability for significant follow-through buying.

The spotty-nosed equity geeks now see limited risk of immediate and serious across-the-board austerity (other than in Greece) and therefore more deficits and lots of juicy profits for corporates. Incidentally, did I see that Italy is planning to deliver a primary surplus within three or four years. What’s “Yer haven’ a laugh, aren’t yer?” in Italian?

CHINESE PMI BLIP

Finally, China’s Manufacturing PMI has dropped from 52.0 in May to 50.9 in June. In the past two years, it has flirted repeatedly with the critical level of 50.0 but it has so far not got there. I see no cause for panic. This is a growing economy and growth never pursues a straight line. Too many people appear to be waiting, with Schadenfreude, for China to trip up. Keep on waiting is my suggestion. As in so many cases, we Westerners should beware of what we wish for. We thought that globalisation would open all markets for our goods. It turned out to be the other way around. Likewise, we get hugely excited about the prospect of a billion Chinese consumers chomping at the bit.

Who will be left to finance our deficits if Li Sixpack decides to consume rather than save?

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