Productivity to bounce off a really low base
No, this is not a summary of an interview for the Expert Series with a great economic mind about the future of global worker output. It is a statement that the investing world comes to a halt during the summer, especially when the World Cup is on. I am guilty of this. Our yield during the last month has been less than normal and frankly, I am going to take vacation during the next one and spend time with Angus. Even people who don’t care about sport, care about the World Cup and come Monday morning, none of us have an excuse not to get back to our day jobs. Even those of you who are denying it was a distraction, think again.
So, what have you missed in the last month? Not a great deal is the short answer. US tech still dominates. EM is still blah, but carry is showing some signs of life against the Yen. US / China trade is the prevailing global threat, but EM assets and specifically, Chinese equities and the RMB remain the only asset class that has been directly affected by the rhetoric. The USD is stuck, as are US long duration yields, even though both are at the extremes of their three-month ranges. Commodities have softened in recent weeks which appears to be all trade related, but energy is certainly performing better than softs and industrial commodities.
Geo-politically, Turkey is nepotistic disaster, UK politics and Brexit looks like a remake of Fawlty Towers, and President Trump’s credibility with everyone except for the 85% of Republican voters who support him is at rock bottom. NATO, Russian intelligence indictments, the Putin summit in Helsinki, and his assassination of Prime Minister Theresa May over Brexit mean that his global standing is lower than my productivity in the past month. And still, President Trump remains irrelevant to financial assets.
The model portfolio hasn’t done a lot in the last couple of weeks. We were stopped out of our short USDJPY position last week when it took out the May highs above 111.20. In typical fashion, pundits went berserk on the reasons for the breakout, but the reality is that it just went up for technical reasons. This wasn’t about the relative stance of monetary policy. Nothing has changed. Classic creating a narrative around price action. It was a technical break while most were watching the World Cup and distracted by the incredible summer weather. Sometimes it is wise to concede that algorithms can’t be sidetracked like we humans can.
So, what does matter for the balance of the summer as we get back to focusing a little more on work? While there are a series of fundamental drivers that will create market moving headlines for specific assets, US earnings season is here again and should reinforce the foundation of my overarching bullish stance. Despite US trade disputes being a drag on sentiment, Q2 earnings out of the US will reinforce the ultimate driver of investment returns and that is the fact that growth and profits, especially in the US, remain vey constructive indeed. While softer sentiment will reduce the multiple that investors are prepared to pay for companies, equities around the globe will continue to be a buy on dips while growth and profits continue to be strong. Protectionism could well hurt global growth, but there is no evidence of this so far and I believe Fed Chairman Jerome Powell will reiterate this point in front of the US Congress this week. I firmly believe that the Fed won’t alter its tightening path until we see hard evidence of a slowing economy so therefore, the trajectory of US rates looks assured.
Back to the UK for a sec; loads of UK data (Jobs, CPI and PPI) and while the Brexit debacle raises some doubts about an August rate increase by Mark Carney, tighter UK financial conditions should be assumed. Despite the absence of a legitimate challenger, PM May is hanging on by a thread and the prospect of a Hard Brexit is well and truly back on the agenda. Establish a long EUR25mm / GBP on Monday and buying more into weakness. See blotter on page 5 for levels.
Bank Indonesia meets this week with no change expected. On Monday, Indian Exports and Chinese Q2 GDP. Tuesday UK Unemployment, and US Industrial Production. On Wednesday, the UK CPI and PPI, EU CPI, and US Housing. On Thursday, Australian Unemployment. Friday, Japanese Industry Activity and Canadian CPI.