In 2018 March confirmed that February volatility and selling was a bottom. For 2019 many fear the opposite, writes Bob Savage.
The start of March is always in important test for markets. In 2018 March confirmed that February volatility and selling was a bottom. For 2019 many fear the opposite. The calendar of events ahead sets the big picture tone for markets now as many see less obvious value plays in equities or bonds. Less hawkish central bankers aren’t sufficient to cap rates anymore as U.S. and UK markets showed this week.
The risk-on mood has limits as well with many now wanting confirmation from the real economy as green shoots need to lead to real growth. The drive of geopolitical concerns over economic ones continued last week with focus on US-China trade deal hopes, UK political shifts driving risks for a hard-Brexit down and opening up another referendum or delay along with a new election.
India/Pakistan and their skirmish over the Kashmir scared many but remained contained with no nuclear fears. The US/North Korea summit ended early but there were some deals – as the US/South Korea agreed to end joint military exercises. All of these stories matter as they were supportive for risk. The tail-risks of December have been unwound again. The outlook for March rests on those risks remaining in check along with a few new fears – like EU elections or US internal politics. Overall, the seasonal push for March will be competing with these fears.
Trade Deal On?
The United States got hit with snow this weekend and markets got hit with more U.S.-China trade hopes. Both are a nuisance for the bigger picture as we all know that there are just 17 days until Spring and maybe even less before Trump/Xi meet and sign something. Trading risk on the basis of a trade deal or acting like the present deluge of wet slush will not matter to traffic is foolhardy. Snow like trade hides a larger issue of policy. The most interesting comments last night came from BOJ Kuroda as he was pressed on the negative effects of negative-interest rates, QE and yield curve targeting. Better to pay attention to low volatility and the search for yield as drivers ahead. Note that JPY trades at 4½ year lows for option volatility and Greek bonds are back to 2006 highs. The friction in this comes from the USD, which continues to rally despite the wishes of the President.
“I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said Saturday. He continued to complain about Fed Powell policy as he referenced “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.”
U.S. divergence on growth and rates is in play for 2019. Many see the outperformance of the U.S. markets – second only to China – so far as the key risk for the next month. The U.S. fears drive not only on Trump tweets and speeches or his political backlash in Congress but also on the economy and corporate earnings. The role of the USD in how Trump operates with China, Japan and Europe is also in play along with the foreign investment flows. The BOJ shift to focus on Japanese yen and its role is a case in point from last week, and it will be watched as Trump meets Japanese Prime Minister Abe.
There are some other headlines to consider for the risk-on continuation today:
- China plans to cut its VAT rate by 3% according to Bloomberg. This would be a $90 billion relief to manufacturers and maybe announced after the annual National People’s Congress. Many expect a more proactive fiscal program with budget deficit rising to 2.8% of GDP from 2.6% in 2018.
- Irish Border deal still key for UK May’s Brexit.
- Korea Manufacturing PMI sinks to June 2015 lows. This follows a rough US/North Korea summit but more likely reflects the hit of the 25bps rate hike from the BOK in November adding to international woes over trade.
For the day, the market is bid for equities regardless of FX or rates. This puts the EUR/USD move as the most interesting one to watch given its back towards the lower end of its ranges and the ECB meeting later this week.
