Blotter: Interesting but not relevant.
To state the obvious, tactical investors need to look at daily news flow and work out what items are relevant to investment returns and discard the topics that are merely interesting. There are many stories that fill the inbox that are intellectually stimulating but whether or not they will be true catalysts for the sustained buying or selling of stocks, bonds, or currencies, is doubtful in many cases. Most headlines don’t matter. Geo-politics often falls into this camp. Folks like me will try to convince you that the interesting is relevant when history tells you it isn’t. In fact, a reading list full of fascinating news items can often distract you from the task at hand. The best advice I can give you ahead of this shortened week, is to stop reading analyses of the “events” this week and pick up a novel. (I am re-reading American Pastoral by the late Philip Roth. Incredible!)
President Trump caving on the ZTE ban is only relevant to investors in the Chinese telecommunications company. There is clear evidence of a global campaign by the Chinese to hurt Taiwan’s diplomatic standing but is it going to drive returns of Taiwanese assets? Debatable. (If you are interested, listen to my Expert Series conversation with Bonnie Glasser from CSIS that we will publish Monday). Renewed hopes regarding Qualcomm’s deal with NXP could go through should give China watchers confidence that the thawing of trade tension between the US and China could continue. That said, we are one tweet away from headlines turning negative again, so ignore this noise. The Singapore summit between President Trump and Kim Jong Un could be back on again but who knows? The Washington insiders who are paid six figures to give you insights are irrelevant versus your twitter feed. All this, not relevant.
The European bears are waking from their slumber with articles appearing about the demise of the European banking system. Just as markets have had to adjust to the normalization of volatility from the artificially depressed levels seen in 2017, European politics is also seeing its “volatility” normalize. Post the French election, European political news ceased to be relevant despite elections in Germany and Italy that produced sub-optimal outcomes. Maybe what we are seeing in Italy and Spain is markets reacting “normally” to the political gyrations of countries that have always been politically unstable. Is a populist, anti-Brussels Italian government or an emboldened opposition in Spain the beginning of the end for European financial stability? Even with Deutsche Bank’s woes, it is hard for me to see spreads widening dramatically with cash rates negative and firmly below neutral. A growth rebound after this economic soft patch will cure all these concerns. I think we will see this in Q3. European banks getting interesting.
Shortened, Holiday weeks are all about positioning and with US 10-year bond yields 18bps off their highs in a matter of days, any weakness in data will be a catalyst for the continuation of a violent short squeeze. Oil prices down 4% on Friday is another stress point. This doesn’t bode well for developed market stocks, especially the SPX but the preconditions for the USD topping and EM outperforming are growing. Turkey is the last hurdle we need to clear. Interesting but idiosyncratic. The thematic model portfolio will hedge equity risk with a new 20% SPX short.
US Payrolls is relevant this Friday as are the swag of PMI releases Germany, EU, UK, Canada, China and the US. The Bank of Canada is relevant to the Loonie focused, as is Canada GDP. US GDP and Consumer confidence are also on the docket. Starbucks closing 8000 stores to teach staff members how to treat ALL people nicely is, for the coffee addicts, VERY VERY RELEVANT! Make contingency plans.