It’s been a good run since late June.
If you were in US or European equities you racked up double-digit gains.
Meanwhile, we’ve got dead vol walking:
And although we’ve discussed this countless times, given where we are valuations wise (i.e. stretched to the max at something like 18X for the S&P) and where we likely are in the credit cycle (global corporate defaults just hit 116, up more than 60% from this time last year), you’d be advised to take inventory of the bevy of landmines we’re walking into.
First up is Yellen at Jackson Hole next week. That’s a wildcard. Recent Fed speak has been anything but consistent and it certainly seems like “on the one hand…” has become the go-to lead-in when it comes to lengthy excuses for preserving policy optionality. We’ll see how confused the Chair’s speech turns out to be and, more importantly, how the market trades it. Here’s SocGen’s take:
“Fed Chair Janet Yellen’s speech on 26 August at the annual Jackson Hole conference is likely to provide clarity on monetary policy for the remained of the year. The dovish tone in the minutes of the July FOMC meeting released on Wednesday seems to conflict with recent comments from NY Fed President William Dudley earlier this week suggesting the possibility of a rate hike at the September meeting. There seems to be division within the committee on the appropriate path of monetary policy. Some, like St Louis Fed President James Bullard, are calling for just one more hike for this cycle, while others believe improvements in labour markets justify removing policy accommodation. We are likely to get more clarity on Yellen’s thoughts on this debate late next week.”
The of course there’s the September Fed meeting preceded by an ECB meeting and compounding it all is uncertainty surrounding the Bank of Japan’s policy “review” which is itself muddled by the soaring yen.
But that’s not all. Here’s SocGen again:
“China will host the next G20 meeting in Hangzhou (preceded by a Finance and Central Bank Deputies meeting on 31-1 and a Sherpa meeting on 1-2). China has been clear that it wants the summit to focus on global growth and financial issues, and mostly stay away from geopolitical issues such as the South China Sea dispute. Mind, the list of geopolitical dangers is large; at the top of it we have the resurgent Russia-Ukraine crisis and the EU-Turkey tensions that threaten to revive the EU immigration crisis. The political agenda for the autumn also includes the Italian referendum, the US presidential election and preliminary EU-UK Brexit talks.”
Once again, geopolitics rears its increasingly ugly head.
While we’re still in the “hunt for yield” camp when it comes to explaining asset price appreciation, Deutsche is out with an interesting take which claims that fully ⅔ of equity market strength can be explained by global macro surprises:
(Charts: Deutsche Bank)
The bad news: global macro seems to be rolling over (again). Here’s some color:
“Data releases over the past week suggest that global economic momentum is softening again, following the recent bout of strength: US retail sales disappointed, pointing to downside for consumption growth, the major support factor for Q2 GDP. Hopes for stronger US productivity have also been disappointed, as year-on- year productivity growth sank close to a 30-year low. In China, weak credit data suggests that the credit impulse will likely turn negative this quarter, consistent with a sharp deceleration in SOE investment growth, at a time when Chinese private sector investment growth has already turned negative for the first time in at least a decade.”
In our minds, the biggest risk may well be cascading corporate defaults. Goldman has continually insisted that this will in fact not be a problem. To wit:
“We raised our forecast for the 12-month trailing default rate to the 5.75%-6.25% range by year-end 2016 from the 4.5%-5.0% range. This revision accounts for the lag effect of higher defaults among Energy and Metals and Mining issuers, but our central thesis remains in-tact “what happens in commodities, stays mostly in commodities.”
If you say so. And on that note, we’ll leave you with two final charts to ponder this weekend:
(Charts: Deutsche Bank)
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