So here we are, priced to perfection in stocks. And in credit.
Never mind the increasingly tenuous political reality in which we’re all forced to trade thanks largely to a populist uprising that’s upending the established political order both at home and abroad (I know, I know, “populism is Democracy!“, “the whole point is to upend the system!,” “we need a reset!” – bullsh*t, bullsh*t, and more bullsh*t – all negative for your portfolio in the long-term).
Sundays are supposed to be quiet days of rest, but that’s pretty difficult when the news flow out of Europe is a constant stream of possibly market-moving soundbites about France, Italy, and Greece (again). Besides, FX markets don’t get as much sleep as equity markets.
I outlined the latest French presidential position jockeying earlier this morning, and brought you the following chart that shows relative French default risk is catching up to the risk reflected in the OAT-bund spread:
Next week should be as interesting as this week.
We’ll get the Fed minutes which means we’ll have yet another chance to appraise the committee’s collective position on the dove-hawk continuum and they’ll be plenty of political news out of Europe. In short, we’ll get a repeat of last week in terms of what we’re supposed to be trying to discount.
For those interested in a preview of what’s important, below find two roundups, one from FT and the other from Barclays.
Investor expectations on Fed and Trump policies will likely lend support to the USD and US rates and equities. Hawkish testimony from Fed Chair Yellen, combined with a raft of strong economic data, has driven markets to price in a modestly higher probability (36%) of a March hike. FOMC minutes (for February) this week could reveal if committee members’ biases have turned more hawkish, given steady progress on the dual mandate. The USD’s performance was mixed last week, but we continue to think positioning is closer to neutral and the USD could rebound readily on any hawkish tilt of the FOMC. Spirits are high in the stock market, with major indices having touched record highs in anticipation of corporate tax cuts, border adjustment and financial sector liberalization. Our equities team believes that current valuations, although high by historical standards, are far from pricing excessive optimism. Markets eagerly await Trump’s address at a joint session of Congress on 28 February for clearer indications on the tax plans.
In contrast to US resilience, the eurozone appear more fragile and strength of the EMU framework will be tested amid rising political uncertainty and questions on the sustainability of public finances. Greece is back in the spotlight again after the IMF warned of unsustainability of its debt. In the lead up to the Eurogroup meeting on 20 February (Monday), European governments and the IMF will be actively engaged in discussions to break the deadlock over the third debt relief package. Owing to increasingly split creditors among a crowded European political agenda, market risk and volatility could mount, although we think European leaders are unlikely to allow Greece to default. Meanwhile, Portuguese spreads have been creeping higher, given stalled fiscal consolidation, while French spreads remain elevated. We continue to see the challenging political, fiscal backdrop and easy monetary conditions for the eurozone fueling EUR depreciation versus the JPY and the USD.
Amid a relatively quiet week for DM, idiosyncratic trends and events in EM will likely be in focus
Don’t be fooled by the the holiday-shortened trading week in the US. Next week promises to give investors plenty to watch, including the Greek bailout, minutes of the Federal Reserve’s last meeting, Bank of England governor Mark Carney’s testimony, retail earnings and Warren Buffett’s annual letter.
Here’s what to look for in the coming days.
Euro-area finance ministers gather in Brussels on Monday to discuss Greece’s bailout even as investors appear to have given up hope on any meaningful progress in talks between Athens and its creditors. Hopes that Greece could secure the release of its next loan tranche have dissipated after Brussels and the International Monetary Fund sparred over their diverging views on the Greek economy earlier this month, with some expressing uncertainty over the IMF’s commitment to participate in the bailout programme.
The meeting has also gained additional significance, as the last major one slated before European elections begin next month, starting with the Dutch.
“With the two largest eurozone economies facing elections this year, we believe it is in their policymakers’ interests to contain any potential risks from Greek disruption,” said economists at Nomura. “We therefore expect some transitory agreement to be reached at least at the eurozone level, with the IMF decision on programme participation likely to be delayed even further”.
Following Federal Reserve chair Janet Yellen’s semi-annual testimony to Congress, investors get to hear from her UK counterpart when Mark Carney testifies before the UK parliament’s Treasury Committee on Tuesday. Mr Carney’s testimony comes after the BoE upgraded its economic forecast, while leaving its inflation forecast and interest-rate policy on hold.
“Since the inflation report was published two weeks ago, we’ve seen downside surprises to wage growth, inflation, and retail sales,” said strategists at TD Securities. “So even after the IR was more dovish than markets expected, we may see a further dovish tone with the IR testimony given the soft tone of the recent data releases.”
The Federal Reserve will release the minutes of its last monetary policy meeting on Wednesday, though they may seem dated since investors have just heard from Ms Yellen. In her testimony to Congress this week, she painted an upbeat view of the US economy and warned that it would be “unwise” to wait too long before raising interest rates.
Bank of America economists say they believe the minutes will reflect “a great deal of focus on both upside and downside risks,” even as Fed officials “become increasingly constructive on the outlook for the economy.”
Moreover, any discussion on the Fed’s balance sheet is likely to garner interest. “Yellen reiterated the view that the primary tool remains rates and that the balance sheet will only be addressed once the normalization of the fed funds rate is well under way,” said the folks at Bank of America. “We expect the minutes to reinforce this view, but there might be some discussion among members on the issue.”
The pace of companies unveiling results slows to a trickle, with just 50 companies listed on the S&P 500 slated to report next week. Among them, however, is the world’s largest retailer, Wal-Mart, along with department stores like Macy’s, Kohl’s and TJX Cos.
Finally, investors await the latest insights from the Oracle of Omaha, as Warren Buffett releases his annual letter to Berkshire shareholders on Saturday, February 25. Investors typically parse the letter for details on the company’s operations, which range from insurance to railways, as well as for Mr Buffett’s investment insights. In last year’s letter, Mr Buffett commented on the downbeat tone of the US political debate. While Mr Buffett campaigned for the Democrat’s candidate, Hillary Clinton, and rebuked US President Donald Trump last year for failing to release his tax returns, he has recently taken the long view. Investors will likely watch for any additional commentary on that front.