I have to leave the geopolitical analysis to others with what went on last night and try to focus on what impact, if any, it will have on markets. Typically these kinds of events don’t really matter more than a few days and this one definitely shouldn’t either. I went to sleep with the S&P futures down 13 pts and now they are essentially unchanged so that helps to confirm my belief. If anything, maybe some of the networks and newspapers will stop the constant, non stop Russia/Trump bedfellow reports now that the Russian’s aren’t happy with us as Assad is a buddy of theirs. Oil is up by almost 1% with the front month contract at a one month high even though Syria doesn’t produce much and gold is doing what it typically does after these type of events, trade up but those moves rarely last. The Russian Ruble is down 1% vs the dollar and the RTS stock index is lower by 2.6%.
The US invaded Iraq on March 20th2003 with ‘shock and awe’ and the bear market ended about a week before on March 11th. Granted the market sold off about 15% from two months earlier as the war rhetoric built to its eventually beginning but all throughout that seemingly endless war, markets recovered from the rough bear that started in March 2000. Bottom line, Syria and our response will be news all day and all weekend but shouldn’t matter at all for markets. Trump’s tax plans and the direction of global monetary policy will still be the main drivers this year.
A day after the March Income Growth component within Japan’s consumer confidence index touched its highest level since 2007, regular pay in February disappointed with a .2% y/o/y gain after a .6% gain in January. Helping the headline cash earnings boost of up .4% was a rise in overtime and bonus’. Real earnings continue to do no better than the modest rise in inflation. The fallacy of wanting higher inflation is if wage growth just keeps up at a similar pace, the wage earners are still no better off than they are today. Thus, the Abe focus should be solely on generating faster real growth, not the nonsense of believing that higher inflation drives quicker economic activity. Even with the higher yen and the overnight weakness in the S&P futures, the Nikkei closed up by .4% but only after falling by 1.4% yesterday. It’s still down for the week and lower on the year.
China’s FX reserves in March totaled $3.009 Trillion, a touch below the estimate of $3.011 Trillion but up $40mm from February. This follows the yen which was basically unchanged vs the US dollar in the month of March but was helped slightly by the US dollar weakness against China’s other holdings. The bulge in Chinese savings is being kept in the country via tightening capital controls. The huge imbalances though still remain. The Shanghai comp was up slightly while the H share index was flat.
In Europe we saw February industrial production figures from the 3 major economies there. German IP rose 2.2% m/o/m which was much better than the expected decline of .2% with a partial offset from a 6 tenths downward revision to January.French IP disappointed with an unexpected 1.6% m/o/m drop after a .2% fall in January. The estimate was for a bounce of .5% and manufacturing weakness led the way. I’m hopeful that a Macron victory in France could be game changing in shifting the government’s focus to policies that free that economy from the clutches of the welfare state. UK IP was also a miss with an outright decline m/o/m led by a negative month for manufacturing for a 2nd straight month. It seems that the benefit from a weaker pound has already run its course. The production of commodities was also negative after a rise in January. Bottom line, these are all February numbers so aren’t really market moving events. Also, a mild winter also tempered utility output.
We also saw an upside surprise with German exports in February and with 40% of their economy dependent on exports, it’s obviously important. Home price gains in the UK for the 3 months ended March saw the slowest rate of gain in years, 3.8% as the Brexit fallout continues on property markets. The BoE is about to conclude their QE purchases of corporate bonds, well before the expected end date because of their success in buying plenty of bonds much quicker than they expected. Thus, soon add the BoE as another central bank that is pulling back in some fashion from its extraordinary policies.