Admittedly, we’re kinda scraping the barrel for possibly notable commentary as the sun sets on a lackluster week for equities.
But under the circumstances, it’s worth noting that headed into the close, the S&P was on track for its first three-day losing streak since December 24 (i.e., since the immediate aftermath of the December Fed meeting, Steve Mnuchin’s Hank Paulson impression and the Christmas Eve massacre). By the close, the index eked out a tiny (0.07%) gain, but you get the point (the chart below was from 3:45 in New York and I’m not changing it).
The risk-on euphoria catalyzed by the Fed’s pivot has given way to renewed trade concerns, global growth jitters and worries that Trump will ultimately force another government shutdown amid intense partisan bickering inside the Beltway, where Adam Schiff is moving aggressively forward with a reinvigorated Russia probe in the House and Democrats spent Friday grilling Acting Attorney General Matt Whitaker.
The threat of an executive order banning Chinese telecom equipment from U.S. wireless networks and news that Trump will not in fact meet with Xi ahead of the March deadline on the trade talks are adding to the market’s consternation.
Meanwhile, recession fears continue to mount, especially across the pond in light of the EC’s updated forecasts and serious doubts about the stability of the increasingly tenuous coalition government in Italy.
In a note dated Wednesday, SocGen’s Alain Bokobza reminds you that while “market expectations have evolved rapidly recently, medium-term scenarios of slowing global growth have not changed.” Indeed, the bank notes that “the second half of 2019 should be much more challenging for the US economy, and recession expectations remain well anchored for 2020.”
SocGen holds one of the more bearish views on the Street when it comes to equities in 2019. Their year-end S&P target is just 2400 and they’ve been one of the more vocal banks when it comes to the notion that a US recession is looming.
“The damage to economic momentum and earnings seems real”, the bank writes, in a separate note (albeit penned by the same Alain Bokobza), adding that “This time, easy monetary policy may lack the strength to turn the tide and avoid a recession.”
Questions about whether central banks will be able to engineer another miracle are top of mind for markets. We talked at length about “pushing on strings” early Friday.
But while SocGen thinks “the road ahead will be bumpy”, they also say “it’s too early to reduce risk for now” in light of a newly S&P-dependent Fed. Here’s what the bank calls “the five implications of the Fed reprising and a weaker USD environment”:
- The Fed en pause is an incentive to trade 10Y Treasuries between 2.50 and 2.80%.
- Gold is a buy.
- ‘Cheap’ EM assets shine after a challenging 2018.
- Peripheral bonds in the Euro Area and Corporate bonds may continue to benefit from inflows from core sovereign bonds
- Global equities continue to be supported by improved valuation
We’ve talked a ton this week about the prospects for the dollar (see here) following the Fed’s dovish shift. And indeed, this was the best week for the dollar index since August:
“Bears are losing out on the stronger relative growth overseas pillar”, Bloomberg’s Richard Breslow wrote Friday, on the way to delivering the following assessment:
Interest rate differentials are fairly meaningless if foreign rates are hovering at nothing. The Fed is on hold, which will always be a better place than central banks trapped by negative interest rates. The dollar index is now approaching resistance of 96.80 up to 97. What it does right here will be very interesting indeed.
Also “interesting” in this context is a note out Friday from Goldman.
“Interest rate differentials are an important predictor of exchange rate returns, but there has been a loose relationship between real rates and the Dollar since the end of the Bretton Woods system”, the bank writes, adding that their research “suggests the broad cyclical trajectory of an economy relative to its peers matters most for G10 exchange rate performance, and rate differentials can sometimes fail to exactly mirror broad cyclical trends.” So, exactly what Breslow said.
To support that contention, Goldman shows that “there have been long stretches where the broad Dollar and rate differentials drifted far apart–e.g., 1997-2004, 1990-1995, and 1980-1984.”
So, while rate diffs matter, they aren’t the sole predictor, which in turn means that a shrinking rates differential occasioned by the pricing out of further Fed hikes won’t necessarily be sufficient to make dollar bears “great again” (sorry).
Of course a weaker dollar is arguably key when it comes to the sustainability of the rally. If dollar strength resumes in earnest, you can kiss the recently resurgent reflation narrative goodbye.