Bedrock’s Newsletter for Friday 13th of April, 2018
13 April 2018

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 Friday, 13th of April 2018

Welcome to Friday the 13th – a classic date on which to end a truly scary week. Markets were shaken and rattled yet again but, amazingly, nothing actually happened! The news-flow was all over the place: from announcements of tariffs and trade barriers rising between the two largest economies of the world to sword-rattling between the two largest military powers of the world, heating-up the reawakened ‘Cold War’ with threats of missiles over Syria. Words worthy of multiple-hundred point moves on the Dow- Impressive if nothing else… And even the Fed, under modified governance, has acted to scare us some more – into this global uncertainty; they raised rates (2 weeks ago)…

But then again, we must repeat our mantra – read the markets to predict the news, not vice versa as many do! And what do we see? Amazing resilience! Just about all markets are not far off their respective highs and with all these rather scary matters thrown at them, nothing has really moved. In due course, a glance at the charts of 2017-2018 will show the recent turbulence as a wiggle in an ascending line. The yield on the benchmark 10-year US Treasury is at 2.82%, German Bunds are at 0.52% and the Japanese 10-year JGBs are hovering just above the zero rate much as they have been for a very long time, having bounced in a tight range, and much as Equity markets have done recently. The currencies? Much the same: the DXY, which is the trade-weighted Dollar exchange rate, is at 89.40; right in the middle of its range for this year. We could call this a “Thundering Silence” shouted at us by the markets! We try to interpret this and conclude that there must be a powerful positive counterweight to these scary matters somewhere in the system. We think that it is the broadening awareness that we are in an amazing ‘Goldilocks’ moment – Low nominal interest rates, low inflation everywhere around the globe (this week we were surprised by the US CPI slipping 0.1% for March vs. the expected 0.2% rise!), declining unemployment and evidence of strong economic performance from industry and services sectors – broad based, across most activities. A logical contradiction emanates here when we say that the general expectation is for Q1 earnings being released now to beat expectations…

We must not lose sight of the fact that markets are a discounting mechanism: they distil in real-time all the available information and convert it into a dollar-weighted price. Each numeric price you observe is, in reality, a complex combination of all the information in the world. Do insist that your children listen in their math classes…

Oil is headed for the biggest weekly advance in more than eight months on speculation that tensions in the Middle East may lead to supply disruptions, reinforcing a buy call on commodities by Goldman Sachs Group Inc. Futures have gained 7.8% this week in New York. Geopolitical threats continue to escalate in Yemen, Syria and Iran with a corresponding impact on oil. This is according to Goldman analysts including Jeffrey Currie, referring to Iran-backed rebels in Yemen who have targeted Saudi cities and oil facilities. Goldman’s analyst posit that the recent escalation in Syria is tied to Iran as well, given the support that the country has offered to the Assad regime. The tensions so far suggest production impacts will be modest and the low and declining inventories indicate the market may be vulnerable to even small disruptions, they wrote. Keep your eyes peeled on this! If you worry enough about the geopolitical situation to consider owning gold, it may be a good idea to own an allocation to energy stocks? We just took a peek at Exxon Mobile’s numbers [XOM] and see its dividend yield is 4% and it is trading down for the year… Hmmm, how wrong can it go? Just a thought in case you were considering a gold hedge…

Do you remember how last year many analysts and economists were advocating ‘overweight’ European exposures? You must be glad you didn’t listen – the tone has changed – With reports of industrial output in the region unexpectedly declining for a third consecutive month and investors turning negative on the economy for the first time since July 2016. Such reports added to signs that momentum slowed after growing at the fastest pace in a decade in 2017. Against that backdrop, European Central Bank officials rejected a push to declare that the conditions are almost in place to end their bond-buying program… Interestingly, after having listened to Donald Trump hark about the abusive trade practices of China, China’s March exports unexpectedly fell 2.7%from a year earlier, the first drop since February last year, while imports grew 14.4%, more than expected, customs data showed on Friday. That left the country with a rare trade deficit of $4.98 billion for the month, also the first since last February. We are anxiously awaiting Trump’s claims that this is a result of his tariff policies…

The forecasts for Q1 earnings are lofty — year-over-year growth of about 17% which would represent the best quarterly gain in seven years for the S&P 500. Earnings are being driven by improved revenue, the benefits of corporate tax cuts that Congress passed in December, and a lower dollar, higher oil prices and several other factors. However, J.P. Morgan thinks investors and analysts are underestimating just how much power those factors will have. When all is said and done, the firm sees earnings up 21% and valuations as friendly. The S&P 500 is currently trading around 16 times earnings, thanks to a sluggish year for the market in which volatility has come back after being dormant for years. Despite the duration of the nine-year bull market, JPM said prices have traded largely in line with earnings. Friday will see the first of the big-bank reports, with Citigroup, J.P. Morgan Chase and Wells Fargo on tap. And do note that at no other time in history have companies held so much cash in a low rate environment! Dividends will rise and stock buybacks will increase as will, most likely, capital expenditure. Goldilocks indeed! Oh, just a reminder that with the VIX at 18, it may appear higher than you like, but it is below its “historically normal level” (above 20).

It looks like the Holy Grail of calling tops and bottoms will remain elusive for the time being. When it comes to making market extremes history clearly doesn’t repeat. While it often rhymes, there are plenty of occasions where market behaviour diverges from the norm.

A thought for the next leg of the markets – In the words of a British Poet, Samuel Butler, “A hen is only an egg’s way of making another egg”.

 

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Market Weekly Highlights

Cash & Commodities

  • The greenback trades steady this week amid further signs of trade tensions easing and a rebound in risk from the latest military escalation in Syria. The Dollar Index DXY is now at 89.77 .
  • The USD gained some ground against the Euro yesterday to finish the week almost flat, a EUR which came off the highest levels of 1.2555 in February to trade back at 1.2335. Same for the CHF which stands at 0.9620.
  • The Pound is trading higher this week at 1.4272 moving towards levels reached in January .The Japanese Yen is flat for the week at 107.64 but still stronger for the year against the USD.
  • After the recent comments and several Russian sanctions, the Ruble tumbled reaching 65 against the USD on Wednesday. However it has now retraced some of the losses and stands at 61.40.
  • The Brazilian Real, which opened the year at 3.3080, had reached almost 3.12 in January against the USD and has moved lower since, now at 3.4129, amid lower apetite for emerging market currencies sparked by trade-war bombast, goepolitacl risks and inflation global comeback.
  • The Crypto Currencies which went through an important correction during January, dropping about 60%, are seeing some kind of a rebound, with Bitcoin moving from 6’000 back to almost 8’000 to the USD.
  • Crude oil WTI trades higher for the week to $67.24 per barrel fuelled by the Syrian events; while Brent is trading at about $72.12 .

 

Fixed Income

  • 10Y U.S. Treasuries which had traded in a range during the last quarter of 2017 with yields from 2.30% to 2.40% have seen yields reaching 2.9537% during the first quarter of 2018 but are now a bit lower at 2.83%, higher for the week.
  • The Japanese 10 year JGB yield opened the year 2018 at 0.053% reached 0.10% in early February and now stands at 0.038%, continuing to offer a POSITIVE yield.
  • In Europe, the German Bund yield nearly doubled at one point this year jumping from 0.40% to 0.80%, but then came back down at around 0.527%, 7 bps higher than where it closed 2017. Same for the French 10Y Yield which had crossed the 1% during February and is now back to 0.75%.
  • In Peripheral Europe Italian 10Y yields are now just above 1.81% trading 9 bps lower than where it started the year so far, whilst the Spanish 10Y yields trades some 57 bps lower than Italy at 1.25% down from where it started the year at 1.61%.

 

Equities

  • Markets in the US have truned negative again for the Year 2018 with the exception of Nasdaq which is still up by 3.43%; DJIA is down – 0.96% and SP500 -0.36%; having dropped from the strong rebound back in February but still higher for the week. The DJIA is at 24’480, the SP500 at just below 2’664 while Nasdaq is trading some points above 7’140.
  • In Europe markets are showing negative returns for the year so far with Eurostoxx50 down -1.50%, DAX at –5.35% , FTSE 100 at -6.60% and Swiss Market SMI at -6.45%. Italy and France are the only markets up for the year respectively at +6.79% and +0.19%.
  • In Asia, the Nikkei trades lower by -4.33% for the year while Hang Seng is up +2.95% together with Bovespa which is trading at a strong +11.83%.

 

Highlighted items are interesting data points for the week. Source: Bloomberg (05/04/2018)

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