While China 'ripples' are top of mind for professional investors currently (though you would not know it from the constant AAPL, AMZN, NFLX chatter on mainstream business media), RBC's head of cross-asset strategy Charlie McElligott takes a step back to look at the overall picture once again.
China's deleveraging is hitting everything - how long before it 'ripples' across the Pacific? Or will the PBOC fold and inject liquidity?
Even Friday’s US NFP headline beat had something in it for the risk-bears / bond-bulls, as the average hourly wages disappointed, and the prior month was revised lower. The Fed then remains on message with regards to their hiking trajectory message. In turn, this continues to fuel the fire for the “Fed policy error” crowd, as the perception is that the Fed is tightening into a disinflationary and slower growth trajectory environment.
As a reminder, iwas the worst quarterly growth for a Fed rate hike since 1980...
This is by far the most common mention from clients when answering the question “What in the current market backdrop most concerns you?”
And as noted below, the removal of the French election ‘left tail’ risk (EU existential crisis averted) will now too allow the ECB to pivot ‘neutral’ on their ‘balance of risk’ assessment, which is inherently a move away from ‘dovish.’
This again captures the challenge of the tactical rates (and thus, macro) trading environment: Central banks are pivoting ‘tighter’ which affects ‘financial conditions’ which affects ‘inflation’ and ‘risk assets’... but the data is holding firm, companies are making money, and rates are still extraordinarily low which incentivizes yield-seeking behavior from asset allocators.
Pros:
Expansive global PMIs remaining at / near multi-year highs.
Still extraordinarily ‘easy’ policy across major CB’s both with rates and asset-purchases. (UPDATE: Inflecting to ‘neutral’ here. The removal of French election calamity now almost certain to see ECB’s Draghi mention that the ‘balance of risks’ has now shifted to ‘neutral,’ which will allow for more hawkish speculation).
Multi-year highs in EPS growth / forward earnings across developed- AND emerging- market equities.
NEW ADDITION: US fiscal policy +++ momentum, as the House passes Obamacare repeal which is a vital step for more constructive developments on taxes and infrastructure following an almost complete ‘sentiment washout’ on US fiscal in April.
NEW ADDITION: Signs of life still seen with US ‘hard data,’ with NFP headline, U-rate, Claims and Consumer Credit better last week. Have to watch against the weak AHE print though last week, which is obviously ‘key’ to inflation and Fed moving forward.
Longer-term ‘repatriation’ tax cut’ kicker’ likely to drive corporate share repurchases (equities positive) and / or debt paydown (credit positive).
Cons:
Fading Chinese liquidity- / credit- impulse which drags on global ‘inflation expectations.’ (UPDATE: one to watch, as PBoC edges closer to liquidity injection to prevent further disorderly market behavior. Next key date will be May 10th, where we will see new financing and loan data from the PBoC).
Fading energy base-effect as crude struggles, with a lot of ‘trapped renter longs’ right now. (UPDATE: longs capitulating ‘real time’ while shorts press into OPEC in two weeks—modest benefit from plan extension jawboning today).
Lack of US fiscal-policy movement. (UPDATE: shifted to ‘pros’ list).
Mean-reverting ‘soft’ data (surveys, confidence seeing smaller beats / outright misses). (UPDATE: ISM Non-Manu and Chicago PMI see big POSITIVE prints last week).
Consumer- / credit- concerns mounting à US ‘brick and mortar’ retail, yesterday’s SAAR prints, US subprime auto, US credit card delinquencies uptick, developing Canadian subprime housing story etc.
Cross-asset volatility profile of ‘complacency,’ with nearly all asset classes experiencing multi-year lows as ‘short vol’ strategy popularity grows, which increases asymmetry / likelihood of an ‘accident.’
[ZH: As a reminder, US Macro data has negatively surprised for 7 straight weeks - dropping to its weakest since October...]
But stocks don't care about fun-durr-mentals...