Blotter: All about headlines aka I miss fundamentals
I often write about the competing agendas of investors with differing time frames. Currently, this is starkly being witnessed by short and longer-term participants in emerging markets. Those of you lucky enough to take a multi-year view will point to cheap equity valuations, less reliance on the dollar and the global export cycle; greater reliance on domestic demand and the improved political and domestic governance that should see risk premia decline over time. Shorter term bears point to poor price action, technical weakness, a stronger USD, Argentine and Turkish woes and ever increasing Middle Eastern tensions. It is an investor mentality versus the mindset of the trader. Both can be incredibly profitable if you get them right.
The Malaysian election is a stark example of this differentiation. While my recollection of Prime Minister Mahathir Mohammod back in the Asian crisis was of a man who threatened hedge funds and western investment banks, they were different times. While he is a devout populist, is it right to be so bearish on Malaysian stocks when a corrupt leader in the form of Najib Razak has been removed via a democratic process that worked well? A classic example of short versus long term thinking.
Since February, when the low volatility paradigm came to an end, investor time frames have become increasingly short term. Factors such as forward equity valuations or the sustainability of economic growth are taking a back seat to headlines, to what is effectively noise. The Brazilian central bank should cut rates again this week to a record low 6.25% yet markets will focus on the ability for the Argentinian central bank to roll over short term paper. With EM spreads back at levels not seen since January, opportunities are coming to own EM carry.
Traders will focus on the outlook for unrest as the US opens its new embassy in Jerusalem and less on, yet again, US CPI coming in below expectations. The bond market was able to absorb a wave of supply and yet again, US 10-year bonds can’t sustain 3% yields. I am convinced that we will see long dated yields 10 -15bps lower in relatively short order, dragging the USD down with it. For all the noise, capped US yields and a peaking USD will underpin equity and credit markets throughout the summer. USDJPY should trade towards 108.00 in what will be a pressure point for macro types.
European GDP is the key data release for the week. Soft patch or something more sustainable? Given that cash rates are well below neutral, I do believe that sluggish economic activity will be temporary. The effects of a strong Euro (year on year) are taking a toll and while a 5% correction in the Euro helps at the margin, weak activity that continues through the summer will raise many red flags. If European growth stalls with negative cash rates, global growth has a huge problem.
We have a bunch of headlines that can move individual markets without having a broad beta impact on the rest of the world. I mentioned Malaysia, but regional Indian elections will confirm whether or not Prime Minister Modi has a problem as 2019 national elections approach. US retail sales and Industrial Production will provide us with a guide to Q2 US GDP. US / China trade talks will continue in Washington with this process looking like it will drag on longer than most expect.
On Monday Japanese PPI. Tuesday, German and EU GDP, and UK employment. Japanese GDP on Wednesday, German and EU CPI, and the US reports on Industrial Production and Housing. Thursday, Japanese Machine Orders and Australian Unemployment. On Friday, Singaporean GDP, and Canada prints CPI.