Showroom dummies

7 min read

The world is not a very happy place at the moment.

That is demonstrated most clearly in the US 10-year note, which had another storming day yesterday at it raced from around 2.40% to 2.32%. That sort of flight to quality should have markets thinking – or is it maybe that because markets are thinking that we are seeing this sharp rally in Treasuries?

Through all the recent ups and downs, especially the downs, of equity markets in general, and of those of the US in particular, there has been little evidence of panic. The prevailing argument has been that the severity of the post-election rally called for a natural consolidation pull-back and that that is what we have been watching happen over the past few weeks. That 10-year yields peaked more or less at the same time that the Dow was making record highs above 21,000 is not something that should have astonished.

THE MIX

But then yesterday’s sharp move to lower yields had a slightly different feeling about it.

At no point has the market priced in four rather than three Federal Reserve rate moves for this year so the rally can’t stem from the suggestion by Philadelphia’s Patrick Harker that two more will do or that he sees no reason why the Fed shouldn’t start to trim its balance sheet. Following Bill Dudley’s comments on the subject last Friday, it now looks as though balance sheet shrinkage is the new party line. The less paper the Fed holds, the more the market has to absorb so falling yields are counterintuitive. Thus market risks must be increasing if yields are not going up. Time to put the finger back on the pulse of the US yield curve.

White House rhetoric ahead of the visit to Washington by Chinese President Xi Jinping has not been overly friendly but that is something markets are beginning to get used to. Wasn’t the Donald going to take on Beijing on day one and brand it a currency manipulator? So far the president has achieved precious little of what he promised and polls already have him with the lowest-ever approval ratings for a man who has been in the Oval Office for less than three months.

The Chinese might not be good at everything but they do have a keen understanding of the difference between what is said and what is done and on that basis it is not impossible that Xi will play to the Trump gallery. The US remains China’s largest export market and the wellbeing of SixPack Wei depends just as much on the American consumer as it does on the powers that be in Beijing or Shanghai. Xi needs to help keep morale in the States on the current trajectory just as much as Trump does so the threat of a bust-up is probably much smaller that many observers may think.

AUTOBAHN

Many of us might be permanently perplexed by the workings of the president’s brain but it’s unlikely that he is unaware of yesterday’s rather dismal March vehicle sales figures. They had been expected to come in more or less flat at 17.3m total sales and 13.6m domestic vehicle sales over the February release. In the event they disappointed dramatically at 16.53m and 12.97m, respectively. The only glossy bit was the rebound of Tesla but one swallow a summer does not make, and seeking solace in the improvement in the quarterly performance of a company that delivers around 76,000 units a year would be fatuous in the extreme.

Tesla sold an estimated 4,050 cars in March, up 46% from 2,775 in March 2016. Excited? Porsche is still outselling them with 4,479 and 4,323 units, respectively. And yet the market cap of Tesla is now, after the stock jumped US$20.22 yesterday to close at US$298.53, at nearly US$49bn. That makes the company worth more than the Ford Motor Company, which weighs in at US$45.5bn on the back of selling just over 230,000 cars in March alone.

THE MODEL

Trump’s “Making America Great Again” slogan was firmly linked to the promise to bring manufacturing back to the country and nowhere would this have been more evident that in the auto sector. The last thing the White House needs is a marked slowing in automotive output. The miss is of itself not all that serious but the magnitude of it is.

A major stumble in Detroit could do serious damage to an already stuttering presidency. The president will know this and so will his Chinese counterpart who could do no better than to sit demurely while smiling, nodding and waiting for time to take its toll on whatever accusations are laid at his country’s door. Trump seems to think that a weakened China is good for America. Xi knows that he needs nothing more than a strong and confident American consumer.

Meanwhile the South Africa thing rumbles on with S&P taking firm action and downgrading the country to BB+ and junk status. Moody’s, already having rated the country a notch higher at Baa2, has been more cautious and has merely put the country on watch. S&P evidently rates the political risk higher than Moody’s. That has pushed the 10-year yield in rand to over 9% although the 10-year US dollar bonds are still trading in the 4.75% area.

Although now in the junk space, the RSA sports a debt/GDP ratio of below 43% as opposed to the US, which is Aaa/AAA and is above 100%. Watch this space – markets might take the Moody’s approach over the S&P. So far that doesn’t look to be the case as the currency remains offered at ZAR13.83/US$.

NUMBERS

Finally, of course, Brexit. Everybody who believes to be anybody is busily getting his or her name in the headlines with opinions on what can or cannot be done and how long it will take to do it. I’m not sure how many out there remember the first meetings between the warring Americans and the North Vietnamese in Paris in the late 60s. I do and the one abiding memory is the length of time it took for the parties to agree to the shape of the negotiating table and the concomitant seating arrangements. Two years might seem like a long time but think in terms of every week being 1% of the time available. Perish the thought!