In what sounds like a classic case of “buy the rumor, sell the news”, a major Wall Street figure is arguing that as soon as the US and China reach a trade deal, the big rally in risk assets will be over. The former CEO of Cantor Fitzgerald, Shawn Matthews, argues that “Right now, it’s a risk-on mentality -- you want to be long riskier assets until you get a deal with China … When that happens you certainly want to be looking to scale back”. One of Matthews’ worries is that bond markets are following suit, signaling to him that this is a false rally. “If it was truly a risk-on world and people believed it and it was an extended trade, then you would see the 10-year start to back up. That’s a clear sign there’s some concern about what’s going on out there”, said Matthews.
FINSUM: This is quite an interesting take on the whole situation. We are going to hold off on giving our full view until we have had more time to digest, but we thought this angle was definitely worth sharing.
Is the US headed for a major slowdown? That is the big question, especially as the economic clouds darken around the globe. The rest of the world, from Europe to China, is slowing, but the US continues to hum along nicely. So are we the last ship that is going to sink, or will the US manage to defy the tides and keep growing strongly? Looking to markets, yields around the world have fallen (including a dramatic increase in negative yielding European bonds), showing that investors are growing more bearish about the economic outlook.
FINSUM: With the Fed paused, we do not see an imminent recession by any means. We do, however, feel the US economy and markets lack a strong narrative at the moment, which makes us slightly nervous.
The topic of the next recession has faded a bit from the mainstream media discussion over the last month, and understandably so. Not only has the market jumped, but the Fed seems to have completely backed off the rates gas pedal. That said, we are keeping an eye on primary and secondary data on the economy to see what the future may hold. Here is some data that is worrying us a bit: global freight shipping rates are tumbling. China’s weak spending and a global slowing of growth has sent shipping rates way down, a sign of excess supply and demand weakness across the world.
FINSUM: This kind of info, along with metals demand etc, are great leading indicators of what might happen in the economy. Add this to the warning signs.
Markets are doing well this year, but there is a lot for investors to worry about. Aside from the current ongoing shutdown, there is a debt ceiling deadline on March 1st (which is sure to be another political nightmare, and may yet intersect with the shutdown), a deadline for a Chinese trade deal, and a scheduled Brexit on March 29th. That is a lot of potential crises on the calendar. However, valuations have fallen considerably alongside share price falls and P/E declines, and the market seems to be regaining its optimistic footing. Corporate earnings look to stay strong in 2019, which will help support the market.
FINSUM: There are a lot of analysts who think this is a bear market bounce, and many others who think the worst is behind us. We are starting to side with the optimists.
Those of you who read our opinions on how the trade war with the US is affecting China will know that one of main concerns is about the relationship between the government and the people in China. This week, Xi has echoed that warning. The Chinese leader stressed the need to maintain political stability in the face of economic challenges. The warning, which came at an unusual meeting of Chinese leaders, shows the ruling party’s anxieties over the social implications of the slowing economy.
FINSUM: Chinese leadership is in a tight jam. On the one hand they have the US squeezing them with tariffs, and on the other, they have the need to maintain the economy’s strong growth to keep people happy. Remember that leaders are unelected, so their grip on control is very tied to keeping everyone satisfied.