Market Movers Week of June 9 2013: Weak Growth Vs.The Hilsenrath Omen?
Here’s a rundown of what’s likely to move markets for the coming week and beyond, and some thoughts about what to do.
Don’t Fear The Reaper Taper
As discussed at length here, last week’s top market mover, speculation on QE tapering, should retain its top spot if there is anything that challenges the prevailing consensus from Friday’s “Goldilocks” (not too hot, not too cold) jobs report, that any substantive QE tapering was now less likely.
Because global economic and earnings growth forecasts remain weak, the Fed’s QE is viewed as a primary pillar of the ongoing rally in stocks, as we noted it would be in our 2013 forecast. Therefore anything that materially raises expectations for the speed and extent of tapering is bearish, the opposite news is bullish. For example, the US jobs reports sent stocks flying higher not because they were particularly strong, but because they weren’t. They showed continued weak jobs growth, nothing approaching the figures that would raise advance expectations about the speed or extent of QE tapering.
In other words, they were bullish because they were bearish enough to keep up the belief that QE 3 would be remain in place for the foreseeable future, and so they calmed fears about any imminent material cutbacks on QE. Bad news was good news.
While the coming week’s calendar is relatively light, there are some events that could move QE tapering expectations. These include:
Monday: FOMC Member Bullard speaks. This is a quiet day for scheduled releases, so comments here might get more attention than usual, especially if they somehow alter the perception created by Friday’s jobs reports that there won’t be any substantive QE reduction in the coming months at least. Bullard is a voting member and is considered among the most hawkish FOMC members. So after the calming message of last Friday’s jobs reports that employment was still too weak to withstand any substantive QE reduction, we have just the person in Bullard to re-awaken those fears and knock markets back.
Thursday: Monthly US retail sales will be the week’s big US data point, and latest check on the US recovery. After jobs, retail sales are among the most important US reports given that they’re a key barometer of consumer spending, which comprises about 70% of US GDP. So this is another opportunity to adjust the prevailing slow recovery picture that keeps QE tapering fears at bay and stock prices high. There will also be weekly unemployment claims. These might also challenge that view if they are especially good or bad, though a given week’s data can always be discounted as an aberration.
Friday: PPI and Univ. of Michigan consumer sentiment might be market moving, but only if they really surprise up or down.
CHINA Weekend Data Downer
Early in the week, especially in Asian markets, we should see the influence of disappointing Chinese export, industrial output, new loans and inflation data that adds fuel to the slowing growth picture in the world’s chief growth engine. Not good. See here for further detail.
Europe: Quiet Except For One Thing…Maybe Two?
As we discussed here, the economic calendar for Europe is almost empty of top tier events, but the two could be explosive.
Tuesday and Wednesday: Germany’s constitutional court rules on whether Germany can participate in (i.e. pay for) the ECB’s OMT program. Remember that? It’s this theoretical (still untried and missing all kinds of practical details needed to deploy it if needed) support for GIIPS block bonds, that has kept these bond yields, and thus EU solvency anxiety, in blessed hibernation despite the fact that the situation has not improved. The GIIPS remain in recession and burdened with even more debt that they can’t repay.
As The Telegraph reports here, the court’s 2 day hearings could be the catalyst for a ban on German funding of that program. A final decision is unlikely, but if the message that comes out suggests that Germany really might not be behind the OMT, then we could see a new round of EU solvency anxiety that even overrides QE tapering concerns.
Thursday Italian 10 Year Bond Sale: If so, we won’t have to wait long to see how bond markets react, as Italy is set to auction off benchmark 10 year bonds. Remember that OMT was meant to provide support for longer term bonds not covered by the LTRO program, which focused on supporting bonds of up to 3 year maturities.
OTHER CALENDAR EVENTS
Tuesday: BOJ rate statement and press conference. Might be meaningful if it brings any new insights on Japanese policy, though none are expected
TECHNICAL PICTURE
For all the recent drama about QE tapering, the longer term trend on the S&P 500 chart shown below shows hardly as dent, especially after Thursday and Friday’s solid closes. As much as we remain suspicious of this rally given the weak underlying growth and earnings fundamentals, we don’t argue with a chart like that. We may be very cautious about new longs (though not averse to opportunities noted below) given how far markets have come without support of normal fundamentals, but we acknowledge the bull market and at minimum avoid shorting it or being too heavily in cash.
S&P 500 JANUARY 1 – PRESENT
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com
47 jun 091046
CONCLUSIONS
The mere threat of higher rates sent income stocks and bonds lower. To the extent that those fears return to their previously subdued level, these should bounce back as yielding seeking cash continues to flow into markets seeking a home. In the end of the day the Fed’s tendency is to err on the side of caution and keep the QE cash spigots open longer, and wait to tighten until there is no doubt that a self-sustaining recovery is in place. Given the economic and earnings forecasts, that’s looking like a long wait.
For now, the Friday jobs reports suggest that QE tapering fear is overdone.
As we noted here, that suggests we should watch for stabilizing in the prices of the quality income equities that took a battering last week, and using the pullback as buying opportunity. There were some quality MLPs (KMP comes to mind, but others too) that had taken ~10% hits. Certain REITS and utilities may also be worth a look if you believe US rates will remain low for the coming years, as we do. We also saw some hits to our Canadian income stocks for the same reason. Like our US income holdings, they’re chosen for their yield size, safety, and growth potential, and add a much beloved currency hedge as the CAD remains among the least abused among the major currencies. Indeed, unlike most others, its wounds are not self-inflicted by its own central bank, but by external forces like the weakening commodity/China story.
By the way, don’t forget to keep seeking ways to hedge your currency exposure by getting portions of your portfolio in assets linked to currencies that have been in long term uptrends versus your own. See here for award-winning guidance on that.
Although the underlying economy is struggling, momentum in US stocks continues to draw in new funds desperate for yields. As we discuss in our coming 2013 second half forecast, as long as a substantive tapering remains a remote threat, the same conditions that have driven stocks higher remain in place (barring a contagion risk flare-up).
It also suggests that USD weakness could continue until we get word of new easing from other central banks. That would remind markets that while all remain dovish, the trend for the Fed is less dovish, and because currencies trade in pairs relative to each other, least bad is best.
The Hilsenrath Omen?
That said, beware that the WSJ’s Jon Hilsenrath, the Fed’s unofficial mouthpiece, reported on today (Sunday June 9th) that the FOMC’s June policy meeting will announce the start of QE tapering. More talk just to let off some speculative steam? After all, what evidence do we have of anything more than a weak recovery in sea of global slowdown?
While we don’t believe there will be any substantial tightening, the past weeks’ price action shows us that any hint of QE cutback, never mind actual reductions, however minor, could bring some volatile times.
The question is, will those be buying opportunities, once markets realize that rates will remain low, or will they truly be the beginning of a substantive pullback?
We remain adherents of David Rosenberg of Gluskin Sheff, and stay on watch for safe income at a reasonable price. The likelihood remains strong that rates remain very low, and that any tapering remains minimal. But will that minimal tapering be enough to send markets diving? Based on the past weeks, could well be.
DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.
