21 June 2017

Equity risks are rising: economic surprises turning lower

Economic surprise turns lower and positive earnings momentum easing in Europe

We are viewing with increasing concern the building evidence of disinflation in industrial commodity and energy markets. Economic surprise indices have turned sharply lower on a global basis, a move which cannot be fully explained by seasonal factors. In this context we were surprised by the relatively hawkish recent policy statements by the US Federal Reserve and Bank of England. For the US Fed, it was very much a case of one and not done at the recent FOMC meeting, where US rates were increased again. For now, earnings growth forecasts near 10% for each of the US, UK and continental Europe remain intact but we also detect ebbing momentum in this data compared to 6m ago.

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12 June 2017 · 3 min read

Fed rate decision: One and done - or not done?

One and not done would spook markets in our view

On Wednesday 14 June, we believe the US Fed is highly likely to raise the target range for the federal funds rate by a further 0.25%. We believe the opportunity the move policy rates further away from the zero “lower bound” will not easily be passed-up as US unemployment figures improve and as importantly without spooking markets, which have priced this move in. However, a signal of “one and done” for 2017 – or at least “one and wait and see” will be critical to keep markets buoyant. In addition, investors will be watching for benign comments in respect of any adjustments to the Fed’s balance sheet policy.

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9 June 2017 · 2 min read

UK election: Another step-up in political risk

A tactical blunder does not mean the end of Brexit or the Conservative administration

UK PM Theresa May’s strategy of consolidating power when the Labour opposition was seemingly in disarray and the Conservative poll lead unassailable has seriously backfired. The likelihood now is that the UK will be governed by a minority Conservative administration with support from the Democratic Unionist Party (DUP). May’s future as leader of the Conservative party remains in serious doubt following a number of campaign mistakes, not least the failure to recognise importance of appeasing the older voter. Much now remains open for debate over the next few weeks.

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1 June 2017 · 5 min read

Volatility: Low, but downside protection in demand

We struggle to understand why market volatility has fallen so far in 2017

One of the notable aspects of equity market performance during 2017 has been the rapid fall in market volatility. Trailing 90-day realised volatility for the S&P 500 has reached 7% in recent weeks. Over the last 20 years, these are levels are matched only during a brief period over 2005-2006. We do not see an especially strong parallel with 2005 as at that point US equities were still moderately valued and the US economy was expanding after a mild recession. We believe investors are once again becoming complacent; but also note the skew towards higher priced put options suggesting within the options market at least that downside protection is at a premium.

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14 May 2017 · 3 min read

Earnings forecasts: a short-term support for markets

Rising estimates notable in continental Europe

While economic surprise indices may now be rolling over, US earnings forecasts for 2017 are effectively unchanged since January. In the UK and continental Europe forecasts have risen relatively sharply since the start of the year, reflecting in the UK a continued tailwind from sterling weakness and in continental Europe the long-awaited improvement in economic activity.

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5 May 2017 · 2 min read

Not really an economic surprise…

Economic surprise indices and raw materials prices rolling over in Q2

One of the notable features of improving sentiment in global stock markets over the last 6 months has been its reliance on ‘soft’ economic data and a continuation of positive surprises. We cautioned in March that economic surprise indices were both seasonal and mean reverting and also highlighted the tightening of monetary conditions in China, historically linked to declines in iron ore prices. Six weeks later, global economic surprise has rolled over outside Europe while energy, coking coal and iron ore prices are falling sharply.

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