Equities are still doing great, and vol-sellers remain in charge, driving the VIX steadily towards single-digit territory. In fixed income, a war of attrition is at play. The front-end is locked, but the long end can’t decide whether to sell-off. In preview, I think it will in due course, delivering the bear-steepener needed to sustain the burgeoning outperformance of value over growth—and cyclicals versus defensives—in equities. HSBC’s bond bull extraordinaire, Steven Major, is sceptical, but even he admits that the long bond might be in for a bit of pain in the near term. I’ll take that insofar as goes an endorsement for a self-proclaimed perma bond-bull. The devil as ever, however, is in the detail. Markets can probably be fairly certain that they have central banks exactly where they want them. Last week’s performance by Powell suggests that the Fed is kicking back from the table, with a dovish bias. Apparently, the Fed now wants to see a “persistent” and “significant” increase in inflation before hiking rates. This sounds an awful lot like the message from the ECB and the BOJ, and while I concede the BOE is in a different situation, but I’d imagine that Carney’s response to the facing the economy next year will be to do nothing. He seems to be quite good at that.
Read MoreApologies in advance; it’s been too long since my latest report, mainly because I think observing markets has been a bit like listening to a broken record. To re-cap; central banks—mainly the Fed and the ECB—made a dovish pivot at the start of the year in response to the swoon in Q4 18. Whether they meant this to be a relatively modest shift or not, investors ran with the story. Within a few months, markets were bullying Powell into rate cuts and by September, and pricing-in rate cuts and QE by the ECB. In other words, the multiple-expanding support from a firm central bank put—perhaps even with a sprinkle of fiscal stimulus hopes—has reigned supreme in equities, and driven yields lower, even as fundamentals have deteriorated. Against this backdrop, the Fed and ECB have delivered, by and large, forcing markets to consider a shift in the Narrative™ that is now too persistent to ignore. I’d break it down into three separate themes.
Read MoreAs I emerge relaxed, and slightly sunburnt, from a week on Ibiza’s still-balmy beaches, I am met with news that the world is going to hell, in a hurry. The dreadful September PMIs, and the soggy ISM headlines in the U.S., seem to have been the key catalyst for a reversal in sentiment. These data appear to have crystalised two bearish stories for markets. First, the trade wars are now a serious issue for the global and U.S. economy, and Mr. Trump either won’t, or doesn’t have the ability, to de-escalate the stand-off. At the very least, the assumption that the White House will be forced to blink into the next year’s election is now under threat. It is now just as likely that the U.S. president will double down on the conflict as a strategy to seek re-election. Secondly, the otherwise resilient consumer and services sectors are now infected by the slowdown in manufacturing and trade. Taken together these points translate rather obviously into a rising threat of a global slowdown, or even a recession. I can’t refute the fact that these two claims are looking increasingly, and worryingly, accurate. For starters, the data clearly are deteriorating, with the most recent alarm bells coming from the hitherto solid U.S. economy.
Read MoreThat screeching sound you heard in equities last week was caused by a train wreck underneath the surface of a steady uptrend in the market as a whole. The hitherto outperformance of growth and momentum reversed sharply, a move that coincided with a steeper curve and a tasty outperformance of value and small caps. The dramatic rotation across equity sectors, and the steepening yield curve, vindicate the story peddled on these pages recently. But the question is whether this is the beginning of a sustainable shift in markets, or whether it’s merely an invitation to buy the dip in an eternally winning strategy? It’s difficult to say. Robert Wiggleworth’s expertly written overview of the flurry in the FT certainly suggests that strategists have taken note, equating last week’s gyrations to the so-called “Quant Quake” in 2007. Apart from the fact that the event is significant enough to merit at least a small footnote in modern finance history, the quotes garnered by Robin indicate that strategists are at least mulling the idea that the shift has legs. This, in turn, presumably means that they’re advising their clients to run with the reversal, which almost surely would do nicely for the portfolio.
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