Despite the geopolitical tensions of last week, the most eye-catching being the US bombing Syrian government facilities last Friday night, the markets rallied on Monday. Bloomberg asks Krishna Memani, CIO at Oppenheimer; does the political risk not matter?
“The markets won’t pay attention to political risk until they absolutely, positively have to,” Memani said by phone. “Unless the underlying economic conditions are getting weaker and the Fed is in a totally different mode and inflationary pressures are building, and then you dump geopolitical issues on top of it, it’s not a catalyst, but it exacerbates the problem far more than anything else.”
One commonly used measure, from BofA-ML, shows that cross-asset market risk has fallen back to below its’ 5-year average, a level it had surpassed in February after the implosion of the volatility ETF. The drop signals that the expected volatility in the prices of rates, currencies, commodities, and stocks is decreasing.
The Bloomberg article also shows that demand for safe-haven assets such as the US 10-year bond has been weak since the start of April, a trend that continued on Monday and today in the early hours, with yields up again.
They also note that JPMorgan strategists believe that traders in the currency market, a market that is relatively sensitive to political sentiment, have not yet changed their views significantly.
“The recent evolution of the global data flow threatens, but have not deteriorated sufficiently yet to materially change baseline directionality of FX forecasts,” they said, adding these risks don’t “yet warrant a comprehensive rethink of medium-term strategy.”
JPM’s Global FX volatility Index has also been dropping to lows last seen in January, when everything was still rosy.
Earnings will save us ?!
We at View from the Peak believe that earnings season, which has started in promising fashion with Bank’s earnings last week, will prove that the US economy is still in good shape.
The return of volatility to equity markets boosted stock-trading revenues across Wall Street, while rising interest rates helped lending operations. And corporate tax cuts sent combined first-quarter profits at the four biggest U.S. banks -- JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. -- to the highest since 2007.
Research by Bloomberg shows that the forecast growth in S&P 500 income stands at 17% for the January-March period, the best growth in 7 years.
All in all it is really looking good for equity investors; The US economy is doing great, which we think will be confirmed by earnings; and the corporate tax cuts will increase profits for companies.
Finally, as highlighted by the FT yesterday, those profits will in some form find their way to investors;
…, shareholder returns in the form of buybacks and dividends will grow by 21.6 per cent to nearly $1.2tn according to Goldman Sachs, ...
…, US companies will buy back about $800bn of their stock this year, JPM forecasts, up from $525bn in 2017, and boost dividend payouts by about 10 per cent to a record $500bn.
This all can only lead to one conclusion; it will not be long before President Trump starts tweeting on the markets again...