Sometimes when you’re faced with too many choices, the best thing is to do nothing at all. When I look at markets, I sense that many investors are thinking along the same lines. If true, I have sympathy for it. In the U.S. economy, the news flow has invited contradicting conclusions. The February NFP report in delivered a hawkish headline, but sluggish wage growth and a higher labour force participation rate suggest a goldilocks interpretation. It is similar in the global economy. We have the promise of a fiscal stimulus-boosted U.S. economy growing close to 4% adding further momentum to a synchronous global upturn. But data in the Eurozone have disappointed recently, and investors also have to count the risk of a tit-for-tat trade war in tariffs. Geopolitics, as always, loom on the horizon too. In FX markets, we are still debating whether reckless economic policies in the U.S. will drive the dollar lower or whether Make-America-Great-Again™ will revive the dollar bull. A wider twin deficit, in principle, could deliver both. We have also been discussing the Libor OIS spread, Italian politics, and of course, the ongoing tragedy of Brexit. I view markets through narratives, but I struggle to come up with one that captures all of the above.
Read MoreMarkets were mulling familiar themes last week. Will a wider U.S. twin deficit change the rules for the dollar and treasuries and is elevated volatility here to stay in equities? Judging by last week, the answer would be: probably and yes. The contemplation over these stories, though, were interrupted by politics. Mr. Trump announced his intention to apply tariffs on steel and aluminium—25% and 10% respectively—and Mrs. May attempted to give clarity on the U.K. government’s Brexit position.* I was unimpressed with both. Before I have a dig at Mr. Trump, I ought to provide an example of someone who supports it. I have great respect for Stephen Jen, but his argument here is like endorsing the idea of a diet by advising someone to eat nothing but kale and carrots for a decade. The analysis of Mr. Trump’s tariffs requires a distinction between the principle and the concrete measures. I concede that China is bending the rules of global trade, but Mr. Trump is stretching the fabrics of macroeconomic policy if he starts imposing tariffs on industrial goods. He is presiding over an economy close to full employment, a low domestic savings rate, and a medium-sized twin deficit. To boot, he is about to let fly with unprecedented fiscal stimulus.
Read MoreI promise that I will not do an explainer of the VIX this week. Instead, I will lead with some observations on markets and finish with a war-story from the world of retail investing. The return of equity volatility has engendered two responses. Firstly, it seemed as if investors breathed a sigh of relief on Monday when it became clear that we could peg the swoon to the blow-up of short-vol ETFs and related strategies. It is always scary when markest fall out of bed, and even more if so if we can’t explain why. Blaming excessive risk-taking in short-vol strategies assured that the sell-off, while painful, would be short. Secondly, every strategist note that I have subsequently read—and comments from policymakers—have echoed this sentiment. A sell-off was long overdue and is perfectly normal. There is nothing to worry about, and underlying economic fundamentals for risk assets remain robust. Many have even welcomed the volatility as a sign of healthy markets. I have no particular reason to disagree, but my spider sense tingles when investors and strategists welcome a 10% puke in equities. I understand that macro traders are excited but real money and long-only? The logical response from markets would seem to be: “Oh, so you think you’re tough?”
Read MoreYour humble scribe is old enough to remember the Kinder egg commercials, which lured kids with the promise of a three-in-one treat. Chocolate, a surprise and something to play with. Markets feel similar at the moment except they aren’t exactly treating investors; they are posing a riddle. The year has begun with a rally in stocks, a collapse in the dollar and sharply higher global bond yields. Just as punters seemed to have settled on this constellation of price movements, though, markets threw a curve ball last week. The sell-off in bonds continued, but stocks weakened, and the dollar strengthened. What the heck is going on? I was never a fan of the idea that a weaker dollar and higher U.S. bond yields signalled investors’ abandonnement of U.S. assets in the face of a shit-show in Washington, aggressive fiscal stimulus and a widening CA deficit. This is especially the case given that we were supposed to keep buying U.S. stocks. That makes little sense if you think that U.S. assets are no longer high quality.
It is relatively simple to make sense of bonds, stocks and the dollar in isolation. But if we want to connect them, our best chance is to start with how bonds impact the two others and work our way up from there.
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