Everyone has a plan until they get kicked in the nuts by a new virus variant, apparently. The speed with which markets deteriorated on Friday on the news that the B.1.1.529 variant—first detected in South Africa and Botswana, but now confirmed in both Europe and Asia—was telling. So is the swiftness with which many countries already are digging deep in the pre-vaccination toolbox of travel restrictions and, inevitably, domestic restrictions of some form. Indeed, even before the new variant, recently renamed ominously to Omicron, arrived on the scene, Europe was inching closer to new restrictions. Austria and Netherlands were in full or semi-lockdown before Friday, and given the direction of numbers in the major economies, it was only a matter of time before more widespread restrictions were introduced. So, here we are; 18 months of rolling lockdowns and travel restrictions, trillion of dollars in public support, and around 70% of the adult population double-jabbed—and shall we say another 10% with immunity from previous infection?—and we’re back to square one. Someone, somewhere, will soon have to start asking questions, but maybe not yet.
Read MoreFor all the talk about a flattening U.S. yield curve, it is ironic that it steepened last week, albeit slightly. The trend, though, is clear enough. The 2s5 and 2s10s have flattened 27 and 32 basis points in the past year, respectively. Another 12 months at this rate and the curve would invert by the middle of next year. This wouldn’t be odd. It’s normal for the curve to flatten as monetary policy is tightened, and it is also normal for the Fed to keep going until the curve inverts. If you believe that an inverted curve is a good recession indicator—which is debatable—this is tantamount to saying that the Fed will keep going until something breaks, consistent with what almost always happens at the tail-end of policy tightening cycles. This probably won’t prevent investors and analysts from continuing to pay close attention to the yield curve. I have sympathy for that, for two reasons. Firstly, it is not clear to markets whether the Fed cares about a flattening curve or not. Some members of the FOMC do, some don’t. Secondly, if the shape of the curve is important to the Fed, the recent pace of curve flattening challenges the prediction by economists and markets that the Fed funds rate will be hiked by 25 basis points three-to-four times in 2018 and 2019.
Read MoreI have trampled around in the same weeds recently, so I will keep it short this week. Equities are doing what they’re supposed to, trying to complete a V-shaped recovery from the swoon earlier this month. Last week was a corker, even for the portfolio, which benefitted from solid earnings reports. Bloomberg’s Joe Weisenthal had me one-on-one on Monday, where I duly warned that the S&P 500 remained overvalued relative to other asset classes. Even Gartman couldn’t have done it better. On this occasion, though, I am happy to double down. A V-shaped rebound to a new bull run looks like wishful thinking to me. Equities are the least of macro investors’ problems, though. The puzzle of the day remains the link between rising U.S. yields, a firming cyclical outlook and a falling dollar. In my last post, I asked the question of whether foreign savings would come to aid of a U.S. economy at full employment—with a record low savings rate—about to be jolted by fiscal stimulus. Open macroeconomics suggest that such an economy should open up a large external deficit, and Japan and Europe have the savings to make it happen. Alternatively I suggested that perhaps the rest of the world doesn’t fancy financing excess spending and investment in the U.S.
Read MoreGoogle informs me that the advice to "sell in May, and go away" comes from the tradition of British merchant bankers—I presume in the 19th century—to leave London for the country side in May and come back on St Leger's Day in September. I am partial to a good anecdote, but does it work? In order to check, I ran a little study using the S&P 500 going back to 1991. The first chart below shows the returns you would have foregone by selling in May and waiting 35 weeks and 17 weeks, respectively, before buying back. I have included both mean and median returns, because the outliers can skew the former when your sample size is not large. The second chart shows the results of a strategy which shorts the S&P 500 in May, buys the first week of October, and holds until year end.
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