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Bill Blain: "Welcome To The Second Half In Which Many Are Very Concerned About A Bubblicious Market Reversal"

From Bill Blain of Mint Partners.

Morning Porridge - July 3rd 2017

“If you can keep playing tennis when somebody is shooting a gun down the street, that’s concentration…”

* * *

Welcome to the second half of 2017. This week is likely to be thin - the first week of the great summer slowdown and Wimbledon, US holidays and payrolls on Friday.

But... what comes next?

We've muddled through the first half. It’s been confusing, interesting and frustrating in equal measure. Global Equities have added over $14 trillion – and with Global Market cap now at $76 trillion, they are about equal to Global GDP. (That’s not a level to panic about overvaluation – but it’s worth noting.) The positives, I am reliably informed, include improving signs of global growth, a supposed economic renaissance in Europe, and a general switch away from bonds into equity. Lots of participants remain very concerned on the prospects for bubblicious stock market reversal later this year, but others point to yet more upside. After all, stock market surprises don’t occur when everyone predicts them…..

The numbers can paint the story:

GDP expectations: In Jan the IMF forecast 3.6% global GDP Growth. Europe was seen at 1.6%, US at 2.3% and UK at 1.4%. These are now forecast as Global growth at 3.5% GDP (down 0.1%), Europe down at 1.4% (down 0.2%), US at 2.5% (up 0.2%), and UK down at 1.3% (down 0.1%). Nothing to panic about.

Global Stocks: FTSE was 7177 Jan and 7346 this morning. Dow was 19881 in Jan and 21350 this morning. Nothing to fret about… 

Global Bonds: 10-yr Treasuries were 2.45% in Jan, and 2.31% this morning. 10-yr bunds were 0.36% in Jan and 0.46% this morning. 10-year Gilts were 1.42% in Jan and 1.28% this morning. Nothing to get stressed over…

In short, it’s been an up, down and shake it all about kind of year… There are clear signals of concern about what the withdrawl of “extraordinary monetary policy” will mean. Normalisation is seen as a threat by some, but by others as a very useful “reset” to get markets back on a properly priced realistic track.

However, the political picture has been very mixed – and looks likely to continue to lead markets. We're moving into a new phase as existing relationships are re-drawn at all levels, from the geo-political, to Brexit concerns. All have the ability to move market sentiment.

In Europe there is a new mood in play: the massive concerns earlier this year about French political stability were unfounded and Macron has kick-started a new era of hope for the EU. We still have doubts about Italy, but Merkel looks untouchable. The ECB has the occasional wobble (like last week’s mixed messages) about how its going to rein in QE, but the main risk for markets is the new Macron/Merkel axis over-promises and under-delivers growth and reform, potentially triggering a new confidence reversal across Europe just as the ECB runs out of capacity for further QE. The market very much expects the "do-whatever-it-takes" dictum means the ECB will step in and stabilise.  

However, we have a significant leadership vacuum elsewhere in the West.

The UK's strong and stable government proved illusionary, and has crashed into disorder just as the critical Brexit negotiations begin. Are markets really pricing in the fact their does not actually appear to be any plan? It’s less than helpful the mixed signals and apparent disunity at the BOE about timing the next hike also suggest dither and weakness.

In the US Donald Trump's unfulfilled promises and rabid twittering are not only embarrassing, but potentially destabilising, raising doubts about leadership, policy implementation and Fed independence of action. 

Trump is notionally "leading" an increasingly fragmented and distracted West while Putin remains very much in charge in Russia and Xi imposes his will across SE Asia. The weekend’s 20th anniversary of Hong Kong's "liberation" from Britain was a blunt message to the former colony: "forget the past, your future is China". Weak occidental leadership opens opportunities for Russia and China.

And what about Japan – where the Abe era looks to be sliding? Abe’s LDP is losing seats and confidence in him is dropping. Things change slowly in Japan, but the new girl on the Block, Tokyo Mayor Yuriko Koike is described as Japan’s Macron by my senior Japan watcher, Martin Malone. And even the Bank of Japan is thinking about how much more to dosh into markets – the answer is less.

Markets move on confidence, and confidence is a function of politics...

Bit of fun this morning as I heard an Irish politician arguing Ireland should follow the UK out of Europe. Hah. But he may have a point.. after all, the Irish have got all the roads and EU infrastructure grants they can possibly use…