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‘Apocalypse Postponed’

But for how long?

If you ask 66 fund managers with some $821 billion under management across the UK, Continental Europe, Asia and the US, it’s time to get more optimistic when it comes to forecasting a reasonably benign resolution to global trade conflicts.

That’s the general conclusion from the latest edition of BofAML’s rates and FX sentiment survey, which carries the amusing title “Apocalypse Postponed.”

Respondents now believe a “broad” trade deal between the US and China is the most likely outcome. Compared to the March survey (when just 31% of respondents thought a broad deal between Washington and Beijing was likely), nearly half expect “no additional tariffs [and] nearly all of the 2018 to be tariffs removed”.

(BofAML)

Note in the right pane that folks don’t seem particularly concerned about the actual imposition of auto tariffs on Europe, either. Consequently, the percentage of those who expect “tit-for-tat” tariffs between Washington and Brussels dropped from 54% last month to just 40% in the April poll.

If you’re wondering whether the survey captured this week’s escalation that found the USTR threatening to slap tariffs on a variety of goods from the EU in retaliation for Airbus subsidies, the answer is: Not entirely. That escalation occurred late in the evening on April 8 and BofAML’s survey period was April 5 through April 10. One assumes the responses (as they relate to questions about a potential trade spat between the US and the EU, anyway) would be slightly different were the survey conducted today.

Additionally, respondents don’t seem to fully appreciate the extent to which Trump’s desire to perpetuate the notion that he’s still “fighting the good fight” (his base loves that) will almost invariably lead him to tilt at other windmills on trade once the China deal is done, especially if a truce with Beijing gives him some breathing room (“playing with the house’s money”) in terms of driving US equities even higher than they’ve already run in 2019.

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As far as whether respondents believe the bond rally has further to go after the rather dramatic decline in DM yields that unfolded late last month, BofA notes that “only a minority of participants expect the rally to extend” (see visual below). That, the bank writes, is “consistent with the increased optimism on trade, as well as a significant reduction in US duration longs.”

(BofAML)

Obviously, Friday’s data out of China along with reasonably upbeat bank earnings helped pressure Treasurys and buoy risk appetite to close the week, underscoring the notion that last month’s growth scare/bond rally was overdone.

The S&P logged a third straight weekly gain on Friday afternoon, crossing 2,900 for the first time in six months, while 10-year yields jumped more than 6bps and are now up some 20bps off last months lows.

And yet, it always comes back to the same thing – namely this (from a Thursday post):

As ever, the ultimate question is whether plunging DM government bond yields and the aggressive dovish pivot from central banks can properly be separated from their proximate cause. That is, to the extent an acute growth scare was behind the plunge in yields and also the dovish relent from policymakers, the only way it makes sense to chase risk is if you believe that i) that growth scare will be seen as overdone in hindsight, or ii) central banks will be effective at warding off a downturn.

“Half of respondents view the change in stance from the Fed as fundamentally driven”, BofAML goes on to say, delving further into the results from their April poll and pointing out that while respondents generally think the bond rally has run its course, market participants do believe the policy pivot was predicated on growth concerns.

(BofAML)

As you can see on the right, nearly half of respondents expect a rate cut within the next two years, which suggests that survey participants either i) think the good times aren’t likely to last over the longer-haul, ii) the Trump administration will ultimately be successful in forcing the Fed to cut irrespective of what happens to the economy or, more likely, iii) some combination of both.

Whatever the case, the mood on Friday was indeed “apocalypse postponed”. The only question is: “For how long?”. Eventually, all cycles turn, no matter how loudly the man in the Oval Office shouts.


 

2 comments on “‘Apocalypse Postponed’

  1. In spite of the fact that no government can afford a down equities market or recession ….this is still called moving the goalposts in the vernacular…

  2. Anonymous

    Hi Heisenberg, thank you for another great piece. “Eventually, all cycles turn . . .” I realize that this is a rather simplistic sounding question, but is it not quite possible that central banks have succeeded in suppressing (if not removing entirely) cycles and their boom-bust effects? I think that it is reasonable to draw this conclusion, because the Fed’s (as an example) inflation/employment statutory mandate could be read to be, in effect, a cycle suppression mandate. In other words, maybe we have finally arrived at a point where at least major stock market indices are not mean-reverting because the societal consequences of a cycle turning and the stock market mean reverting would be unacceptable to policymakers.

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