So much going on, and none of it is relevant
This is one of those days where, if I wanted to, I could provide you with pages of commentary about the upcoming events this week. I could dedicate a section to the North Korean summit and the impact that this could have on Asian equities. You could get multiple pages on the Fed raising rates for the second time this year. I could give you some thoughts on the ECB regarding tapering, the Bank of Japan and their continued path towards owning every Japanese bond and finish off with the apparent dressing down that Angela Merkel gave President Trump at G7. A photograph that I have included above will become iconic, as it summarizes beautifully the way the world feels about Donald Trump, but is America’s standing in the globe relevant to financial assets? Are my family office or endowment clients going to liquidate risk asset positions because the world has realized that President Trump has zero regard for perennial allies? The answer to that question is No.
There are so many interesting narratives and none of them are relevant to the performance of asset markets over the course of the next several months. Sure, the Fed could be a little more hawkish or dovish in its tone, but is there anything on the horizon that implies that the Fed wont signal that they will continue on their path of raising rates again in September? US data remains strong and despite benign inflation, the US economy remains on a tax cut induced sugar high that should keep the earnings outlook rosy for the balance of the year. The ECB could talk about tapering, but even dovish commentary probably won’t be enough to push the USD index above 95, a technical cap that is likely to hold. Ranges matter more for short-term investors than the slew of events that are filling the inbox.
I have talked at length over the last couple of weeks about how discussions of the USD being strong is overblown. The USD remains in the bottom quartile of its three-year range and while these broad indices mask the dollar’s strength against numerous EM economies, the facts are that the dollar isn’t that firm in the aggregate. One thing which I do think is very relevant is how successful emerging market central banks have been at defending their currencies of late. The 5% rally in the Brazilian Real on Friday was another example of the successful defense of a currency facing undue pressures. Historically, monetary authorities have a checkered past regarding stabilizing emerging market currencies that are facing stress. However, over the past several years, Russia successfully stemmed the tide and as we stand today, both Turkey, Argentina, and Brazil are, temporarily winning the battle. While it is too early to claim victory, central banks are certainly reclaiming credibility, and this bodes well for EM equity performance for the balance of the year.
Ranges will matter more than headlines, and we are getting levels where reversals are likely. Equity markets have gotten uncomfortable when US 10-year yields head towards 3%. The SPX approaching 2800 looks stretched as does USDJPY at 110. Emerging market underperformance looks excessive and a further short squeeze in EM currencies post the moves in Brazil on Friday will help.
The Fed, BoJ and ECB meet this week. On Monday Japanese Machine Orders, and UK Industrial Production. On Tuesday Japanese PPI, the UK reports on Employment, and CPI. UK CPI on Wednesday. On Thursday, Australian Employment, Japanese Industrial Production, and German CPI. On Friday EU CPI, and US reports Industrial Production.