Day after day, analysts warn that the dramatic decoupling of the U.S. economy and U.S. assets from the rest of the world is increasingly unsustainable.
By now, the narrative has been repeated ad nauseam: U.S. fiscal policy has catalyzed a wave of buybacks and bolstered corporate bottom lines while serving to prolong the stateside economic expansion, while the threat of a trade war and the stronger dollar undermine global growth and deep-six emerging markets, respectively.
Last month, JPMorgan’s Marko Kolanovic called the divergence “unprecedented“, noting that “if one looks at price momentum – it is positive for US stocks and negative for Europe and Emerging markets across all relevant lookback windows.”
That, Kolanovic wrote, “has never happened before.”
Generally speaking, those inclined to stay upbeat on U.S. equities believe that the more likely resolution to the extreme juxtaposition is a bout of dollar weakness catalyzed by either a deceleration in the U.S. economy or a Fed pause. Either way, if the greenback takes a break, EM assets and ex-U.S. risk sentiment more generally can recover, reducing the risk of spillover. It’s also possible that the Trump administration deescalates the trade tensions and there was a bit of good news on that front Wednesday.
In a webcast on Tuesday, Jeff Gundlach suggested that stretched positioning in the dollar was likely a contrarian indicator. “I don’t think we’ll have new highs in the dollar without first seeing new moves to the downside”, Jeff said, adding that the specs are “way long and now they’re wrong.”
Still, there’s little to suggest that the Fed will be inclined to lean decisively dovish in the near-term. There’s a vociferous debate about whether the hikes will dead end in 2019, but between now and then, upbeat U.S. economic data and the threat that tariffs could drive up consumer prices support the case of more rate hikes, which in turn bolsters the greenback.
In any event, Goldman is out with a fresh set of visuals and some accompanying color that underscores just how disconnected the U.S. economy and U.S. assets really are from the the rest of the world. There’s nothing particularly novel in the charts or the commentary, but considering that this debate is all that matters right now, I suppose it’s worth highlighting.
“In Europe, recent data points to activity acceleration now behind us and our economists recently lowered GDP growth estimates [while in EM] they say current headwinds imply a slowdown in sequential growth of around 1.0-1.5pp annualised in 2018”, the bank writes, in a note dated Monday, adding that currently, we’re witnessing “one of the largest differences in PMIs between US and non-US regions in the last 30+ years.”
And then there is of course the equity disparity flagged by everyone on the planet. “The S&P 500 is now in one of its longest periods of outperformance relative to the rest of the world and more recently the gap has widened”, Goldman writes.
But it’s not just the econ and stocks, it’s also fixed income. “German, UK and Japanese bond yields have dislocated from their US peers”, Goldman continues.
Finally, the bank looks at credit, noting that “EUR HY spreads widened while US HY spreads remained flat recently supported by the low supply.”
Again, there’s nothing “new” here, per se, but this glaring decoupling will continue to grab headlines until it resolves itself one way or another.
The hope, obviously, is that the rest of the world catches up to the U.S., because the alternative is that the U.S. economy and U.S. equities catch down to what will then be seen in retrospect as the rest of the world’s “reality.”