October 22, 2019
However, what wasn't approved today, was the timeline on how long it will take Parliament to agree on how to legislate it. With that, the formal exit of the UK from the EU may happen at the end of month, or may not. The ugly process of law making will likely take longer than nine days, but importantly, this continues to signal that both sides are ready to move on — as we've seen in the case of U.S./China trade dispute. The removal of uncertainty is good for the global economic outlook.
But EU officials now have more certainty on what the deal looks like for Europe.
With the above in mind, we have a big European Central Bank meeting on Thursday. Remember, last month, the ECB announced that it was going back in the QE business, to start buying assets again in November.
Their stated plan, at the moment, is not to change the asset mix from their past asset purchases, which consists of corporate and sovereign bonds. The question is, will the ECB step up the firepower, to manage any increased downside risks associated with the terms of the Brexit deal?
As we've discussed here, adding European equities would be the "bazooka" of monetary stimulus for the European economy.
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October 21, 2019
Most importantly, for markets, this looks like we have removed another overhang of uncertainty.
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The next spot to look for the temperature on a Brexit resolution is German bunds. And yields on German debt are testing a technical trend break from deep negative yield territory, signaling an improving outlook.
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With German yields leading the way, the euro benefits, which makes this chart the next place to look. And the euro is testing a big trend break too.
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With the euro threatening a bullish breakout, and with Trump and China allegedly forming a currency pact, it's no surprise the dollar outlook should be lower. And this chart confirms it, with a breakdown underway.
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If the prospects of a no-deal Brexit and an indefinite trade war have now been removed from the probable scenarios, then the outlook for gold deteriorates.
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As you can see, the trend in gold looks vulnerable here too.
But, if the removal of the trade war threat does indeed unleash animal spirits in the economy, especially with central banks in an ultra-easy stance, inflation could start finally moving…and quickly. Then you buy gold again.
October 18, 2019 UK parliament will vote on a Brexit deal with the EU tomorrow.
Remember, this is a deal based on the 2016 referendum where UK citizens narrowly voted in favor of leaving the EU (52 to 48). That gap would have been wider had it not been for a coordinated campaign by global leaders threatening a draconian outcome. With that, there was public shame associated with voting for the "unknown" over the "known." But when left to the privacy of an individual vote, the people chose the unknown outcome as better than the known outcome. But as we saw with Grexit, Brexit has created leverage. Despite the dire warnings for UK citizens, the reality is, everyone loses if the EU (and other world trading partners) were to turn their backs on the UK. The EU bluffed that it would play hard ball. But as we near the finish line, they have agreed to establish free trade — no tariffs, no quotas. And despite the warning by President Obama (in 2016) that the UK would be put in the "back of the queue" for a bilateral trade agreement, Trump has promised a "big trade deal" by July, following their exit. With the above in mind, a withdrawal agreement has failed twice already in the House of Commons. But given the fragility of the global economy, the state of global trade (with U.S. tariff escalations now including Europe), and the fatigue of the long, ugly Brexit path and negotiations, I suspect we get an approval of withdrawal, with the goal of moving on to the next chapter.
October 17, 2019 In the spirit of dealmaking, after the U.S. and China came to terms on a (limited) deal on trade last Friday, the UK and EU leaders came to a deal this morning on Brexit. The deal will go to a vote in the House of Commons on Saturday. At the moment, the bookmakers in the UK are still showing a better chance that the deal won't be approved on Saturday, and rather the October 31 hard deadline will be extended. We will see. If we look at the currency markets, as a gauge, the response is positive. Both the euro and the pound have been rising all month in anticipation of a deal, as we have been headed toward the impending October 31 deadline. |
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Listening to the press conferences today, the tone of the UK/EU deal sounds much like the tone of the U.S./China deal — both sides (in both deals) capitulating to get it done and move on. It seems that all parties involved have come to the realization that not only is global economic sentiment eroding, it's beginning to show up in the data. And if left to evaporate, it would be very dangerous for the global economy. Perhaps that's why both Europe and the Chinese had the similar comments to make about the respective deals: China's Vice Premier said its about "peace and prosperity for the whole world." The President of the European Commission said today that the deal is about "people and peace."
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October 16, 2019 The start of third quarter earnings season has been overshadowed by macro events thus far (trade and Brexit negotiations), but earnings the numbers have been good. Remember, never underestimate the appetite of Wall Street and corporate America to dial down expectations when given the opportunity. So, we came into earnings season with the table set for positive surprises. And we're getting it. About eight out of ten companies have beat earnings estimates so far, showing year-over-year growth, not contraction. But it's still early. With Bank of America earnings today, we've now heard from all of the big four banks (JPM, BAC, WFC and C). We've seen big positive surprises in the banks from Q4 of 2018 through Q2 (all against dailed down expectations). But the banks have generally not just shown good performance against the low bar of expectations, the year-over-year growth has been strong too. The key contributor has been a strong consumer. So, how did the banks look in Q3? We've had positive earnings surprises Citi, JPM and Bank of America for an average year-over-year earnings growth of 14%. That is strong. Though Wells Fargo was the outlier, missing on expectations, as they took some pain preparing for a new CEO to start next Monday. The earnings strength from the major banks (three of the major banks, in the case of Q3) follows 21% average year-over-year EPS growth from the big four in Q2. Again, the consumer has not faded, despite a nine month public debate over recession cues. And remember, we looked at this chart from Citigroup’s Economic Surprise Index as we ended Q3 … |
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This chart doesn't fit with the earnings expectations/ recession story. Learn more about my premium stock-selection and portfolio service here.
October 15, 2019 After a holiday in the bond market yesterday, markets are at full strength today. And we get to see how global markets digest the trade deal news of last Friday. What was the response? Stocks ripped higher, globally. Yields were on the move, higher. Gold, lower (a signal of de-risking). And we had a broadly lower dollar, which should be in the early stages, following what was described to be a currency agreement between the U.S. and China. While the media is toiling away, scrutinizing the merits of a deal that they never understood or thought the U.S. needed in the first place, the markets are beginning (very early stages) to price in a world where an indefinite trade war concern is removed. Commodities have yet to move, but that is where the biggest wins should come, if this deal does indeed clear the way for fiscal stimulus, structural reform and ultra-easy global monetary policy to drive a boom-time period for the U.S. economy (and a legitimate recovery for the global economy). Add to this, the risks surrounding a disorderly exit of the UK from the EU, appear to be diminishing rapidly. Not surprisingly, with the above in mind, the market that was most clearly positioned for the worst-case scenario for the global economy, is reversing: global interest rates. Below is the German 10-year government bond yield. With global central banks wrongly positioned for an indefinite trade war, market interest rates crashed after the December one-two punch by the Fed and the ECB (the Fed hiked rates and telegraphed continued mechanical tightening and the ECB quit QE). After formally selling 30-year German debt with zero interest back in August, this major benchmark interest rate finally bottomed when the ECB repented for its sins and announced it would restart QE in September. With the hints late last week that a trade deal was in the works, German yields have now surged 16 basis points since Thursday – and nearing a big technical test of the downtrend.
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What about U.S. yields? Remember when everyone was panicked about a recession, being signaled by the yield curve inversion? As you can see in the chart below, the inversion (10y/2y) was short-lived. |
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The plunge in global market interest rates, and the yield curve inversion, were punishment for central banks being ignorant to the risks of a potential indefinite trade war. So, now we have global central banks back in a defensive stance. And now we have a deal that may end the trade war (at least as a front-burner issue). How soon will we see U.S. yields march back toward and above 2%? |
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October 14, 2019 We have a quiet open to the week, with bond markets closed for the holiday in the U.S. This follows the big U.S./China trade deal that was announced in the Oval Office on Friday.
Big? Of course, people are picking apart the lack of detail, skeptical that an actual deal was made. Some are scrutinizing the heavy demands that aren't part of the deal. And of course, at the moment, it's a hand shake. And a hand shake with the Chinese Vice Premier, not President Xi.
With that, there is an overwhelmingly skeptical tone in the media about the prospects of seeing a formal deal, and, in the near term, the influence this "deal" will have on markets and the economy. Much of the skepticism is underscored by the view that Trump is forcing/manufacturing an end to this trade war (i.e. it's not a real deal).
But people are forgetting that Trump started the trade war. And he has maintained enough leverage so that he can finish it (when he sees fit). That appears to be the approach he has taken.
If he says its a deal, and ultimately removes tariffs. Then it's a deal.
And whether it looks great or not, or has big impactful consequences long-term, it clears the overhang of uncertainty, now, that has been weighing on markets and the global economy. With that, we'll get to see what the unfettered power of fiscal stimulus, structural reform and ultra-easy global monetary policy can do for a U.S. economy that already has very solid fundamentals (record low unemployment, record household net worth, record consumer credit-worthiness, a record low household debt-service ratio, well-capitalized banks, low inflation, affordable gas).
That should be plenty of tailwinds for a re-election. And Trump likely turns back to China for the big demands in a second term.
October 11, 2019 We've talked about the potential for a cut down trade deal and a "melt-up" in stocks.
The catalysts have been lining up. After forcing global central banks back into an ultra-accommodative stance, with the risk of an indefinite trade war hanging over the heads of central bankers, Trump has positioned himself, to make concessions at anytime (in this case, a "limited deal") and claim victory on the trade war. After this week's U.S./China trade meetings, it sounds like that's what we're getting. Trump has called it a "Phase 1" deal, which includes an agreement on "currency issues," which I suspect will result in weaker dollar, not just against the yuan ,but a broadly weaker dollar. Most importantly, both parties stood in the oval office and ceremonially shook hands in an Phase 1 agreement (in principle). The intent was clearly to signal the end of the trade war (for the moment), to clear the overhang of uncertainty on markets, and move any further phases of negotiations to back burner issues for the global economy. This probably keeps the Fed on hold this month, in a wait and see, posture. And I suspect we'll see global sentiment, which has waned over the past year, bounce back.
October 10, 2019 Early this year, we talked about the prospects of seeing the U.S./China trade dispute ultimately resolved through a grand currency agreement (i.e. a Plaza Accord 2.0).
Indeed, as we awaited the high level U.S./China trade talks to begin this morning, it was reported overnight that a currency pact is in the works. With that, let's revisit my May note for some background on why it makes sense, and what to expect … Excerpt from Pro Perspectives, May 21, 2019 "With the stalemate on U.S./China trade talks, let's take a look today at how this may end. A lot of attention has been given to trade quotas, intellectual property theft and the challenges U.S. companies have accessing Chinese markets. What hasn't been talked about as much is the currency issue. Yet China's currency is at the core of it all. China has used a weak currency to leapfrog almost the entire world over the past 30+ years, capturing 15% of the global economic market share and rising to an economic power. They've gone from a $350 billion economy in the early 80s, to a $13 trillion economy today (the second largest economy in the world). That's how they got here, and we've talked in recent weeks how they are attempting to stay here …. going back to what they know, weakening the currency, as a tool to fight the impact tariffs. With that, the trade war has been manufactured by more than three-decades of China's currency war. It only makes sense that it can only be resolved with a primary focus on the currency. We may find that if/when the U.S./China stalemate ends, it will be with a grand and coordinated currency agreement. With that, a lot of comparisons have made between the U.S/China standoff and that of U.S. and Japan in the 80s. That was ended with the 'Plaza Accord' — an agreement between the U.S., Japan, Germany, England and France. The Plaza Accord was a plan to balance global trade, through a 50% depreciation of the dollar (vs the yen and d-mark). We may wake up one day and find a similar agreement has been made between the U.S. and major global trading partners (which may include China, or not)." So, what happened to stocks, following the '85 currency agreement? Stocks rallied about 15% into the end of the year in 1985, following the deal. Stocks were up 16% in 1986, and rose as much as 40% year-to-date in 1087, prior to the October crash. Gold rose close to 60% of the next two years.
October 8, 2019 Prior to the high level U.S./China trade talks tomorrow and Friday, the U.S. took the opportunity to ramp up the offense.
The Trump team blacklisted eight Chinese tech firms and restricted the visas on some Chinese officials, all of which they associated with human rights abuses on Muslim minorities in China. Why now, just as they head into trade negotiations again? Leverage. Trump has always had leverage over the Chinese on these negotiations, and has been in complete control (able to make concessions and pull the trigger on a deal at any time). But that leverage has eroded in recent months. The Chinese Communist Party (CCP) has gained some leverage, as the U.S. economy has softened, and as the 2020 election draws closer. China has had the option of holding out, if they think the prospects are favorable for seeing a new U.S. President next year. With that, as they come to Washington to resume negotiations, it appears that Trump has found an angle to dissuade the Chinese from turning their backs on a deal. By taking aim at the human rights abuses of the CCP, he telegraphs how the specter of the fight might change. He draws in the other half of America (the other party), and U.S. allies, that have been apathetic if not annoyed by the distraction of a fight (in their view) over a trade imbalance. Up to just a few months ago, the Democratic candidates had no interest in talking about China. If China chooses to hold out now, and Trump subsequently escalates the focus on China’s human rights record, then the "dealing with China" topic could easily become the biggest issue in the election. With that, despite the criticisms of the moves yesterday, China has sent their A-team to Washington. We'll see if Trump opts for a cut-down deal, with the plan of going after the bigger demands after the election.
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