While I don’t believe the US stock market was worried whatsoever about the French election in terms of its pricing and recent action and the French CAC as of Friday was only about 2% from a multi year high, it’s clear that we dodged a bullet with the high likelihood of a Macron Presidency. It will be interesting to see how he squares his prior assistance to the Socialist party with his appreciation of business and the desire for lower tax rates. I’m hopeful on the latter but we after all are still talking about France, the bastion of the European social welfare state. MFGA, Make France Great Again!
For US stocks and what matters most, it will still be all about when and what tax reform looks like and the tightening headwinds this year that will be monetary policy. I’m sorry people but I’m going to keep hammering home my belief that central banks are the biggest risk to markets this year as the monetary punch bowl is slowing being taken away. With a Macron victory, I look forward to hearing from Mario Draghi on Thursday on when the next taper is. He may or may not give any indication but if he was worried about European politics before the weekend, there goes that and he now has a green light to taper again. German bonds in particular are taking it on the chin and it’s not just their long end. The German 2 yr yield is higher by 9.5 bps to -.70%, matching the highest since late January. The German/French 10 yr yield spread is also back to the late January levels with its sharp narrowing today. Peripheral European bonds are rallying with French oats.
I continue to like the euro and can’t stand European sovereigns which are again a huge short after this recent French fear rally. (See details on the Ideas Page)
I think the US stock market has been completely desensitized to the possibility of a government shutdown as we’ve been down this road before and we all know that if the government closes, it will soon reopen. Therefore, move on.
US Treasury yields will continue in the tug of war between soft US data, hopes for tax reform, pretty good overseas data, lower political worries in Europe, now likely higher European yields and less central bank largesse. I’ll stick to my belief that the post Brexit vote lows in yields will never be seen in our lifetimes and that the 2.30-2.60% range in the 10 yr will reestablish itself after the events of yesterday.
While I understand the knee jerk reaction in gold to sell off today, I hope at some point people finally realize that it’s never been a safe haven trade. It’s just a currency that happens to be yellow, weighs more than a piece of paper and happens to be really difficult to get out of the ground. What is more clear is the troubled state of most fiat currencies and the attractiveness of gold against them. I mean even the US dollar index level is no different than where it was two years ago.
Chinese stocks continue to trade like crap. The Shanghai comp closed down by 2.4% to the lowest level since Trump’s inauguration. It’s now barely up on the year. The recent action is mostly in response to the Chinese government’s attempt to start reigning in leverage and market related shenanigans (what they call risk prevention). Financial News which is a news periodical from the PBOC said they will be introducing more directives to lower leverage levels in the financial system and part of that will be to tame money supply growth. The first line of the story said “The pace of financial deleveraging is steadily advancing.” Well maybe we can now add the PBOC to the list of central banks this year that will be taking away monetary liquidity. The Chinese 10 yr bond yield is also rose to the highest level since August 2015.
Data wise, we saw the important German IFO business confidence index for April and it rose .6 pts m/o/m to 112.9 and that was .5 pt above the estimate. A rise in the Current Assessment more than offset a drop in Expectations. The headline figure is now at the best level since July 2011. IFO said succinctly, “The German economy is growing strongly.” German business was not too worried about French politics either.
Last week we saw soft consumer spending data out of the UK and today we saw weaker industrial business news. The CBI industrial confidence figure fell to 1 from 15. The estimate was for a drop of just 3 pts. Total orders got cut in half and selling prices remained just off the highest level in 6 years. Smacks of stagflation. Exports fell 7 pts but optimism for them improved on the weak pound. CBI said “Manufacturers’ anticipate that new orders will grow more moderately over the near-term, largely owing to a predicted slowdown in domestic demand outweighing export orders growth – expectations for the latter are at their strongest in over two decades.” They also said “There was a softening in investment plans across the board, particularly those for buildings and plant & machinery, with the latter at its most negative for nearly six years. When queried about potential limits on capital spending over the next year, the proportion of firms citing inadequate net returns climbed to the highest in a decade. Headcount saw decent growth, but hiring intentions for the next three months are muted.” The BoE has themselves in quite a pickle.