By Bill Blain of Mint Partners, Blain’s Morning Porridge – June 28th 2017
Uncertainty, confusion, a Tech-sell off.. but are things as bad as they seem?
“Now I got mortgages and homes, I got stiffness in my bones, ain’t no beauty queens in this locality…”
As we reach towards month end and the half-year, markets do not feel like they are in particularly solid territory. Lots of uncertainty out there. Relax. Never as bad as you think, but it helps to understand what is really going on. Noise, and lots of it.
I highlighted on Monday the shifts occurring in underlying sentiment and direction. We’ve had bullish/tightening comments from many central bankers, and clear signals the debate has moved on from the continuation of “Extraordinary Monetary Policy” towards “Normalisation”. The outlook for growth (Europe, perhaps, aside) is increasingly fraught. I sense a degree of “contradictory bluster” billowing around markets.
In Europe, Draghi has given a very positive assessment on recovery, pushing up the Euro and denting bonds. What he said was simple – policy remains accommodative until we get recovery, when we will normalise and tighten. Every bank analyst I know says recovery is great for undervalued European banks as it will improve margins and reduce the damage in Non-Performing-Loan books. (Of course, if European growth proves less than solid and the accommodative policy that has so inflated asset values ends, or growth is thumped by global events, then the opposite will be true of European banks….. (Clue.. I’m still bearish European banks!))
And then there was Bank of England governor Mark Carney slapping a further £11.5 bln capital requirement on UK banks to back up their consumer lending – a clear sign he’s concerned about the mismatch in flat-lined wages, expanding credit, and the threat something wicked this way comes that could trigger a wave of consumer defaults? Like..? Higher rates, an economic crash, a bursting bubble sentiment shift, or inflation? Carney senses a lack of balance!
Or how about China. The perennial market threat everyone brings out when there is nothing else to panic about? Reading the press this morning, lots of rising concerns about China. Political distraction about how the next 5yr congress will “correct” mistakes of the past. How will the leadership’s attempts to consolidate their position in terms of the current crackdown on corruption” and capital outflows on overseas assets? While the consensus remains China can sort its complex financials out, it’s a political issue – the imposition of power vs economic growth. Misunderstood politics are deadly for markets. Any kind of exported China ructions will damage global sentiment!
And I could go on…
It’s the sense of mismatch between where the markets are, the comments of central bankers about normalisation, the threat of politically driven instability, and the doubts about a tangible economic recovery that are fuelling a sense of growing confusion and doubt. As I so often write.... Get Over It!
Is this a growth market or do we face a looming recession with the risk of higher interest rates? My macro economist, Martin Malone, can show me pages and pages of solid market signals confirming a trend towards synchronised growth – he says I just worry too much about the noise surrounding it! He was listening to Yellen last night and came back positive in terms of sequencing and bullish on stocks!
So, should we wondering about the sustainability of current financial asset values, or the effect of a slowdown on stocks, or is it still full steam ahead on the basis central banks are unlikely to do anything that risks the wobbly global recovery?
On the other hand, for a Fed Member (John Williams) to say: “The market rally is running on fumes”, was not particularly helpful. Markets are never “Priced to perfection”, as he said y’day. They anticipate based on what they see and hear…
So this morning is not presenting a rosy picture in Global Tech Stocks, and a fug of weakness and uncertainty surrounds markets! Do the recent declines mean they are now in buy territory, or is something more fundamental underway?
As stock markets tumble through moving averages, my stock picking guru, the redoubtable Steve Previs, says the “conventional” technical indicators are all on solid sell signals, and lower closes point to more downside ahead.
Steve stares at charts. He understands the arcana of what the lines actually mean. He use’s exotic spells (and a ruler) to cast trend lines and discern the underlying cycles.
I’d say he’s in “concerned” mode. This is not a collapse, but it highlights the potential of one. Although some sentiment gauges (like equity call/put ratios) are flat, “indicating a complete lack of concern”, the VIX has risen to 11.06, and any rise in the “fear index” highlights less complacency about where the market is going.
Steve has thrown his bag of market bones into the air, (I believe they once belonged to one of his investors who didn’t pay up), and based how they’ve landed, his market read is for the current cycle to bottom in the next few days and could well turn positive into August. He’s got a wary eye looking at 1 year, 4 year and 10-year cycles which don’t top out till mid-August – at which point… Be very afraid.. or something like that...
(What he’s actually looking for is the right moment to step in and buy big! After the deluge!)
So what is the outlook for H2?
Let’s be realistic – things are never as bad as we think they might be. The economic numbers do look suspiciously positive, but there are also good reasons to be wary. A big correction is probably coming, followed by some confusion and then a marvellous buying opportunity as the world continues on its merry new normal slow recovery would be my guess? The sun will rise every morning….
And on this note of confusion and uncertainty, let the march into H2 continue!