The second quarter of 2017 has not really begun particularly auspiciously - how could it with April 1 falling on a Saturday, followed by two weeks of school holidays then the long Easter weekend.
The quarter should begin firing on all cylinders today and much of the shilly-shallying from weakened trading teams of the past two weeks could be swept away and the true colours of market sentiment should be revealed.
US markets needed a strong day and that is what they got on Monday. The Dow rallied 183.67 points to close at 20,636.92, reversing all but 20 points of the aggregate of four consecutive days of index losses carried forward from last week’s trading. Treasury yields rose, albeit not in a major way, to close at 2.251% and a long way from the 2.38% they had been when the Dow had been at 20,656.10.
Are bonds telling us something that equities aren’t or have US Treasury markets jumped the gun and got it all horribly wrong? Between Monday March 13 and Monday April 16 the 10-year yield fell to 2.251% from 2.627%, which is a significant move in anybody’s book and certainly one which does not exactly square up with general Fed rhetoric. Instinctively I’d suggest the flattening of the 2s/10s yield curve back to 104bp to confirm my view that Fed balance sheet shrinkage is a lot more distant than the last FOMC minutes might have suggested and that the Fed is actually still a long way from releasing the long end of the yield curve back into the hands of market forces.
That is only instinctive because I don’t think the market is truly smart enough to think and act along those lines and the rally of long rates probably has more to do with good old fear than with any true longer term conviction. Nevertheless, the picture remains confused with the VIX having backed off from its recent high of 15.96 with a 1.30 rally back to 14.66. Thus, let’s not get too far ahead of ourselves by crying “risk off” on the back of falling Treasury yields while watching the VIX index fall by nearly 10%. From a cross-asset perspective there is evidently still a major lack of joined-up thinking although I am hopeful that with a return of the Street to full strength we might get a little more clarity as to what the mood really is.
RATTLESNAKES
Politics will of course not go away with the rattling of sabres in Korea and of nerves in France.
Latest French polls have Emmanuel Macron, Marine le Pen, Jean-Luc Melenchon and even François Fillon all within a margin of error of each other. Having blithely declared a month ago that as far as I was concerned the French elections were a done deal I do have to humbly eat my words although I’d still be very surprised indeed if we didn’t end up with a Macron/le Pen run-off with Macron storming home although I called both the Brexit referendum and the US presidentials the wrong way. Third time lucky?
Are Treasuries maybe rallying because of Korea and the not-insignificant geopolitical risks “down there”? Although the newswires are humming with the latest American moves, the Chinese have been active by not only cancelling coal imports from North Korea but actually physically returning some of the goods. They can also, if needed, turn off the oil taps. I hear speculation that China might also review food aid but, on past form, I’m not sure the North Koreans would give a toss.
BRAND NEW FRIEND
Japan is also making its voice heard, emboldened maybe by the presence of US Vice President Mike Pence in Tokyo. This is another trip to a country that sports a significant trade surplus with the States, currently at or around US$65bn per year. I was tickled to hear the huge discrepancy in car imports and exports mentioned. This was a theme in the late 1970s when I lived in the US and I remember being told how risky it was to drive a Honda in mid-America where one might quite easily and randomly be driven into by a large piece of Detroit steel. The household I lived with in LA owned a Honda Civic and very useful it was too but the mid-West heartland was not impressed with the cheap, well-built and economical interlopers. The best the Yanks could come up with was the Ford Pinto and AMC Pacer.
Already then the Americans were demanding the Japanese buy more of their cars but while the Japanese were producing something the Americans liked, Detroit had still not worked out that the Japanese drive on the left – right-hand drive US cars are still, forty years on, as rare as rocking-horse poo - and that most of their vehicles are wider than many of Japan’s urban back lanes. Current Japanese Kei Car specs are for a width of no more than 148cm; a Dodge Ram is 202cm wide. It’s not rocket science.
RICH
We are now also into the Q1 reporting season with Bank of America and Goldman Sachs due show their figures today. The figures need to be treated with some caution; Q1 2016 had been particularly tricky for the banks and outshining the same period last year should not be too difficult. Comparisons with Q4/16 will be drawn on the earnings front and there is the elephant in the room which is the promised reform of Dodd-Frank, another major election promise that is still waiting to be brought to the fore. Bank of America, my alma mater, is a lot more important than Goldman as it might reveal whether Trumponomics has in any way fed through to Main Street. Employment numbers would indicate that the economy is on fire even though one can’t go 24 hours without some strategist warning that the economics is just about to fall off a cliff. Thus, SME lending figures will be of paramount importance and the litmus test as to how mid-America is faring.
As observed above, from a market perspective Q2 has yet to gain traction and I believe the coming days will be significant pointers as to where they will be heading.
EASY PIECES
Meanwhile we’ve had a cracking set of economic figures out of China where year-on-year GDP growth for Q1 was reported at 6.9%, 0.1 percentage point better than consensus and substantially ahead of the pessimists’ forecasts. March retail sales were also much better than forecast at 10.9% as opposed to the 9.7% predicted. The cherry on the cake was an overnight report of residential property prices having stabilised with gains being reported on 62 of the 70 cities surveyed as opposed to only 56 in February.
The good news on property with its concomitant wealth effect will ease some fears with respect to persistent over-indebtedness although a problem postponed is not a problem resolved.
Apart from US corporate reporting, the main event of the week will be the eurozone manufacturing PMIs on Friday.
Good luck with what’s left of it.