Don’t Fight The Rate-Setters? Or Are Stocks ‘The Real Aberration’?

Don’t Fight The Rate-Setters? Or Are Stocks ‘The Real Aberration’?

Markets seemingly like the Trump administration’s mini-relent on Huawei.

The decision to grant a temporary general license authorizing some transactions with the company and its 68 non-US affiliates (more here) appears to have put the brakes on the selloff in semis – at least temporarily.

The exemption also opens the door for Google to walk back its decision to suspend business ties with Huawei. Google will continue to update software on the company’s phones through August. “Keeping phones up to date and secure is in everyone’s best interests and this temporary license allows us to continue to provide software updates and security patches to existing models for the next 90 days”, Google told CNBC, in a statement.

This all comes not a moment too soon. Yesterday’s rout in chip stocks put the SOX on track for its worst month since the crisis.

Read more: When The Chips Are Down

“Between the Huawei ‘workaround’ out last night and then earlier this morning, the release of the ‘official’ adjustment details for the Chinese RRR cuts, we saw risk rallying almost ‘too easily’ earlier [with] Spooz jumping +17 handles off [the] lows at one point, and indicative of the latent potential for ‘squeeze-moments'”, Nomura’s Charlie McElligott wrote this morning.

“The Nomura QIS CTA Trend model continues to show a ‘no man’s land’ profile for US Equities with trigger levels to both upside- and downside- both comfortably away from spot”, he adds.

It’s worth noting that the global dovish pivot is still in motion. It wasn’t hard to see it coming, but the Aussie gave back some of Monday’s post-election rally. The RBA minutes and Philip Lowe’s closely-watched speech both effectively “confirmed” a rate cut.

Again: Don’t underestimate the power of central banks, even as geopolitical concerns mount.

“It’s certainly reasonable to argue that equities may have put in a top for now. Maybe for longer than now. But it is too early to call the market broken until it breaks”, former trader Richard Breslow wrote for Bloomberg on Tuesday. “Maybe we’ll finally see an episode where political risk does overwhelm the rate-setters. It just hasn’t happened yet with lasting effect.”

That’s true, and it’s not always easy to discern what part of falling yields and rate cut bets are attributable to growth concerns and what’s down to, well, to central banks either cutting rates or suggesting they’re about to. That means you can’t just plot the S&P against 10-year US yields, point to the “jaws” (top pane) and say “Something’s gotta give”.

Still, it’s hard to ignore the seemingly conflicting signals. (As an aside, EM equities are having a tough go of things.)

“With Trump seemingly twitter-triggering the recent risk rotation, it would be easy to apportion blame solely to the US/China trade spat, but the reality is that for the large part of 2019, global equity markets had been moving counter to many other cyclical barometers”, SocGen’s Andrew Lapthorne wrote Monday.

“Government bond yields, for example, have continued to decline in 2019, bund yields are once again negative and Spanish bond yields have hit historical lows”, he goes on to note, before asking whether “the upside move in equities this year is the real aberration”.

Ultimately, Lapthorne observes, global equities are just “oscillating” around forward earnings trends.


“Certainly the trend in earnings growth is not encouraging, despite the usual fillip from the reporting season”, he said. “Indeed, it is the downward pull of weaker earnings that is limiting the upside in equities.”

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