Bedrock’s Newsletter for Friday 8th of June, 2018

Posted by Carlota Vandekoppel on 8th June 2018

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Friday, 8th of June 2018

We are Friday and are under the sign of the G6+1 as the G7 has been unofficially renamed… There will likely be a chill in the air at Friday’s G-7 meeting in Quebec following President Donald Trump’s decision to press ahead with tariffs on steel and aluminium imports from the European Union, Mexico and Canada. The two-day summit will see Trump meet with his counterparts from Canada, Japan, the U.K., France, Germany and Italy. Given that last week the U.S. announced it would impose tariffs of 25% on steel imports and 10% on aluminium imports from countries attending the G-7 summit, the meeting is unlikely to be pleasant.

The countries affected by Trump’s tariffs have already responded. The EU said it would retaliate, having already indicated in March what goods, ranging from cranberries and orange juice to Bourbon and motorbikes, it could target. It said its tariffs could take effect on July 1. A rather pathetic response, but come to think of it, what does America export??? Amazingly, none of America’s trading partners suggested tariffs on F16 fighter jets…

“Brace, brace, brace” as they tell us on airplane crash drills… No more sipping Bourbon and Coke in our Ford Mustang or Corvette Stingray… We must resign ourselves to Chivas in our Jaguar or Mercedes… Somehow, we can’t quite see the logic in Trumps actions; The deficit with China over the first four months of 2018 is $119 billion up from $106.5 billion in the first four months of 2017. The deficit with the EU is up nearly $11 billion over the same period and the deficit with Mexico is up by $1.1 billion, only the deficits with Korea and Canada have narrowed. As such, Trump is likely to keep the pressure on China and the EU at the forthcoming G-7 meeting on Friday. Wow! But why not think for a moment- Is a trade deficit such a bad situation? Remember what it really means- The “Rest of the World” is shipping stuff to the Americans at prices which are inferior to the cost of making the same in the States. Nice, but it gets better yet- That same “Rest of the World” accepts bits of paper made in America, in exchange. What is so bad here?

Where things are getting seriously messy is in Turkey. Turkey joined a string of emerging-market central banks whose interest-rate decisions have surprised investors, tightening policy on Thursday for the third time in less than two months. The lira surged and the nation’s bonds rallied. The decision came three days after an inflation report showed consumer prices rose 12.15% in May from a year earlier, with the worst core reading on record and producer prices advancing more than 20% Investor expectations were building for another increase after central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek met investors in London late last month to reassure them that policy makers were willing to act if necessary. But no one in a Bloomberg survey expected an increase of the magnitude Turkey delivered, raising its one-week repo rate by 125 basis points to 17.75% and signalling that it’s willing to stand up against political pressure and fight double-digit inflation. Brace-brace-brace… it does bring back memories of some years ago… and just like that past époque, whilst Turkey has domestic challenges to contend with, other key emerging markets have also been hiking interest rates faster than investors anticipated in part because of a need to protect their economies against a rising dollar and outflows of capital as the U.S. Federal Reserve tightens monetary policy. India’s central bank this week raised its benchmark for the first time since 2014, joining peers in Indonesia, Mexico and Argentina. Brazil is also coming under pressure from investors. But a certain malaise extends beyond the emerging zones- German factory orders unexpectedly dropped for a fourth month in April, raising the prospect that an economic slowdown at the start of the year may be worsening. Orders, adjusted for seasonal swings and inflation, slid 2.5%, the Economy Ministry said Thursday, compared with forecasts for an increase of 0.8%. Not so nice as would say Trump… let’s hope these are aberrations in measure, not in real activity. The Economy Ministry tried to downplay the bad news, saying the order backlog at factories remains “very high.” It also said it isn’t clear how much global uncertainty is affecting orders.

Back to our Bedrock Mantra- Look at the markets to anticipate the news, not vice versa! On Wednesday, the NASDAQ and the US Small Cap stock indices broke into new, all-time highs… Goldman’s chief economist says the US GDP growth rate has probably peaked. The Federal Reserve is widely tipped to raise its federal funds rate next week and Goldman Sachs tips a rate hike every three months for the next seven quarters. Speaking to CNBC’s “Street Signs” on Thursday, Jan Hatzius, Goldman’s chief economist, said U.S. growth would remain, however, well above the long-term trend as tax changes from the Donald Trump administration continued to benefit both businesses and consumers. The Fed’s own forecast estimates it will set 3.25 to 3.5 percent for the funds rate at the end of 2020. Goldman believes the target could be reached by the end of 2019.

Either outlook only reinforces our long-standing view that equities have a way to go and that the bond markets are facing serious headwinds. Our nemesis, the US Dollar remains an enigma. With all the talk of protectionist moves, with the strength of the US economy (absolute and relative), the quasi certitude in rising interest-rate differentials in favour of the USD, why is the Dollar Index [DXY] sliding back down to 93.60? could it be a reaction to some heavy-weight views? The U.S. dollar is a major buy and is basically unstoppable, if you listen to the advice of HSBC’s chief currency strategist. “There’s nothing to stop it at the moment,” David Bloom, the bank’s global head of foreign exchange strategy, told CNBC’s “Squawk Box Europe” on Tuesday. “As we argued, the greenback is back, the cyclicality of the U.S. economy is superb.” “There’s nothing I could possibly imagine that could stop the Fed in the next couple of weeks from going again, and there’s nothing I could possibly imagine that’s going to stop the ECB (European Central Bank) from doing nothing at its meetings,” he said. “So there you’ve got the diversity of monetary policy: one of the engines of growth powering ahead, and the other spluttering along the tracks and needing a push by the policymakers.” Hmmm…

The markets are moving around quite a bit, or so it seems, but in reality, volatility is very low again- the VIX, the favoured “Fear Index” is steady at 13, historically a low figure, basically at the low point of this year if somewhat above last year’s lows. Then we have an interesting development in the oil patch- The spread between West Texas Intermediate and Brent crude futures prices has widened to new extremes recently, and this is a bullish development. The spread has reached more than $11, the largest since mid-2015. WTI is trading a little over $65 per barrel, while European Brent crude, the international benchmark for oil, is trading near $77. Had we been traders, we may have been selling Brent for WTI at these levels…

Are the good-times over? JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon doesn’t see any reason the nine-year economic recovery will end soon. “We’re probably in the sixth inning,” Dimon said Friday at an investor conference in New York. “It’s very possible you’re going to see stronger growth in the U.S.” In previous cycles, the economy has seen 40% recoveries in less than the nine years it’s taken the U.S. to grow 20% this time around, Dimon said. But perhaps Jamie didn’t consider recent Gallup Poll, Mr Trump’s support among members of his own party at the 500-day mark of his presidency sits at 87%, second only to George W Bush’s 96%, which came nine months after the September 11 World Trade Centre attacks.

Arguably, Trump is following the advice of Martin Luther King, Jr. who said “A genuine leader is not a searcher for consensus but a moulder of consensus.” And for your weekend smile, be thankful we’re not getting all the government we’re paying for. Will Rogers

Market Weekly Highlights

Currencies & Commodities

The greenback which rallied strongly last month almost against all currencies, reversed this week giving back some of its strength. The Dollar Index DXY hit 95.00 ten days ago and stands now at 93.65. The USD has strengthened against the Euro since the beginning of the quarter hitting 1.1510 at its lowest and is currently hovering around 1.1750 as Euro Area growth momentum slows confirmed by the latest Manufacturing PMI data, and as fears on Italy continue to persist.
The CHF is unchanged this week, moving 1 figure down on Wednesday and then up again as euro Area tensions resurfaces due to Italy’s situation. The EURCHF dropped to below 1.14 last week before recovering a bit and standing now at 1.1550.
The Pound traded slightly higher this week around 1.34 after topping at 1.4375 last month and hitting 1.32 at the lowest few weeks ago
The JPY is almost unchanged this week moving hovering around 109.30, remaining stronger for the year against the USD.
In EM, the Russian Ruble steadied at around 62.70, while the Turkish Lira went on free fall and reached 4.92 against the US$ at its low point, before recovering a bit to 4.50 after the Central Bank raised interest rates again.
The Brazilian Real, also moved lower, now at nearly 3.91, amid lower appetite for emerging market currencies sparked by trade-war fears, geopolitical risks and rising US interest rates…
Bitcoin is now pausing at 7’580, after the big drop since the beginning of May
Crude oil WTI trades steady for the week at $65.50 per barrel but stronger for the year amid the tensions fuelled by the Syrian/Iran events, lower US inventories and Iranian Sanctions; while Brent is trading at about $76.70

Fixed Income

10Y U.S. Treasuries yields, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40% crossed 3.10% mid-May amid inflationary pressures and now trades at 2.90%.
The Japanese 10-year JGB yield opened the year 2018 at 0.053% and reached 0.10% in early February. It now stands at 0.047%, 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 this week came back down as low as 0.20% amid Italian crisis fears to actually mark 0.43%, where it closed 2017. Same for the French 10Y Yield which had crossed the 1% during February and is now back to 0.80%.
In Peripheral Europe Italian 10Y yields are now just above 3.00% having hit 2.49% from 3.50% last week, amid internal political turmoil and uncertainties, whilst the Spanish 10Y yields trades some 155 bps lower than Italy at 1.44% down from where it started the year at 1.61%.

Equities

Markets in the US have turned positive again for the year 2018 with NASDAQ trading some points above 7’630 up 10.60% YTD, SP500 at around 2’770 up 3.62% and DJIA trading higher at just above 25’240 returning +2.11% for the year.
In Europe, markets are down, showing negative returns for the year across the board with the exception of French CAC40 which is up 2.32%. So far Eurostoxx50 is down -1.92% for the year, with the Italian FTSE MIB losing almost 14% in one month amid the surging of political uncertainties and showing -1.93% YTD. FTSE 100, DAX and Spanish IBEX 35 are respectively at -0.39%, -1.53% and -3% while the Swiss Market SMI still down strongly at 9.50%.
In Asia, the Nikkei trades lower for the year so far marking -0.31% on the back of the reversal in yen, while Hang Seng is positive 3.47% for the year and Bovespa trading lower at -3.34%, having given back all the outperformance, losing nearly 17% in three weeks.

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