Macro concerns on rates and deals
Market volatility has increased markedly over the past two months. There are several macro concerns fostering consternation and a concern among investors. Here are a couple to consider with some narrative:
Powell Powers Ahead
The market has become increasingly apprehensive about the pace of rate hikes. If one looks at the current Federal Reserve Fund Futures market, the market disagrees with the Fed and expects only one rate hike next year. This, along with growth fears, is pushing the yield curve flatter, which would suggest we are nearer to the end of rate hikes in this cycle or growth is set to slow markedly in the near-term.
I think we will almost assuredly see another hike in December but then it is likely the Federal Reserve will pause for an extended period. Although the US economy is still doing exceptionally well, prior rate hikes have begun to adversely affect more interest rate sectors like housing and autos. I think the Fed will need to see if this begins to stabilise before continued hikes.
Importantly, inflation is not a problem at this point and higher inflation would be welcome in many countries, so a premature culling of growth on the back of restrictive monetary policy would be ill advised. There has been a growing view in the market that inflation will, at the very least, remain well contained in 2019 owing to the fall in oil prices and base effects. Should this come to fruition it could give the Fed the flexibility to pause and/or raise rates by less than their current expectations.
I think December’s Federal Reserve meeting will eradicate any remaining rate fears as commentary is likely to be very dovish.
The Art of the Trade Deal
Trump is unlikely to back down on China trade and IP issues. Xi is unlikely to back down and bow to Trump. I think if one understands the history and personalities involved they could possibly assume that this trade war may not be resolved in a quick fashion, nor will it produce a result of a “one-sided” win. If you have read Trump: The Art of the Deal you will understand Trump’s stance. From reading the book it is obvious Trump’s philosophy revolves around focusing on winning above almost everything else. In fact, if you had read this book back in the Eighties you would not be surprised about how this is all playing out. Here are a few quotes to optimise this:
• “I’ve read hundreds of books about China over the decades. I know the Chinese. I’ve made a lot of money with the Chinese. I understand the Chinese mind.”
• “Deals are my art form. Other people paint beautifully on canvas or write wonderful poetry. I like making deals, preferably big deals. That’s how I get my kicks.”
• “My style of dealmaking is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.”
The Chinese too will not back down lightly. Years of foreign occupation and servitude has developed a culture of resistance to bullying. My feeling is the Chinese will not let foreign powers ever again disrupt their evolution or progress and will not let anything stop their ambitious goals of advancement. Besides, Xi does not need to worry about getting re-elected. He is leader for life. This gives him an almost unlimited chalice of patience to drink from.
The only way I see this resolving in a more rapid fashion is if Trump fears his re-election hopes are fading due to his hard stance on China. His base appreciates his tough immigration stances and anti-China rhetoric, but any economic dislocation felt among this group may begin to erode this loyalty over time. It’s one thing to be tough and aggressive when you have economic prosperity, it’s another story when you begin to worry about your next meal.
Potus may also bend to the cues of the stock market — tweets do tend to suddenly appear after a day of red. The saying is that, in trade wars, the guns are pointed inward — nobody wins. It may, therefore, come down to who can hold out the longest. Tweets will not solve this — only a real deal will. The upside to this theory, is that if a deal does materialise soon, the market likely is pricing in a more negative stance so a faster resolution would be very positive.
More importantly, it is almost assured that global trade is here to stay, and investors need to separate trade negotiations with trade wars. While short-term tariffs and counter actions may alarm the markets, most economists recognise the advantages of free trade. We would assume that negotiators recognise that the result should be a fair deal that benefits all parties, as we witnessed in the “New Nafta” deal.
These geopolitical and macro factors will likely continue to buffet markets over the medium term. The uncertainty, however, provides ample opportunity for specific investments. Risk off days tend to drag everything down indiscriminately and offer various pockets of potential opportunity. There are numerous investments that have their own secular growth stories that don’t need low interest rates or a trade deal.
• Trump: The Art of the Deal by Donald J. Trump, Tony Schwartz https://tinyurl.com/ybyweeb4
• Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd and can be contacted at firstname.lastname@example.org. Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trade mark or copyright claims should be directed to the author by e-mail.
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