It’s been an exceptional week for the bulls, while miserable bears, full of gloom, were punished for their cynicism.
The bulls are back in town
I wonder whether the curve tracking cynicism has flipped. I mean, normally the cynics are the ones who proclaim doom. These days, what with trade wars, Brexit, retail slump and the woes of the car industry, the cynics are in the ascendance, it’s unusual for market observers not to be pessimistic. But what about those who are cynical about cynicism, who think the warnings of woe are overdone? The last few days has been good for the cynical cynics.
Another curve has flipped too, for the better. The yield curve tracks the difference between the yield on long and short-term yields. Attention normally focuses on the difference between the yield on two and ten year US government bonds. If the longer term yield goes below the shorter term yield, then that is known as a flipping of the yield curve, and is meant to signify an impending recession. In August the curve flipped, and the global economy was put on recession alert.
Last week, however, things changed. The yield on US treasuries rose at the fastest rate since the Trump presidency began. A cursory look at the US Treasury website tells the story. Back on September 3rd, the yield on both two/year and ten-year US Treasuries was 1.47 per cent. At close of play last week, it was 1.79 per cent for two-years and 1.90 per cent for ten-years.
The S&P 500 did pretty well in the last few weeks too, up eight per cent since the last week of August.
The markets seem to be telling us that the bears have got it wrong.
Bloomberg quoted one analyst, Steve Chiavarone, a portfolio manager with Federated Investors as saying: “We may have gotten to peak recession fear last month.”
There is more than one reason for this switch into more bullish territory.
Last week, data revealed that US core inflation rose to an 11-year high. I am not sure such a jump can really be counted as good news, but it does at least indicate things are seeming a bit more normal. Frankly, given the massive US government stimulus implemented by President Trump at a time of such low US unemployment, economic theory was screaming that inflation should rise. In this post truth era, when Presidents and Prime Ministers seem to be able to do and say anything as outrageous as they want, without losing popularity, it is good to know that something is working the way it should and inflation is obeying the rules of economics.
There is at least one really good reason for recent rises in US stocks, both the S&P and NASDAQ. Three of the giant techs have had a stonkingly good few weeks and indeed in one case, months. Apple shares are up almost a quarter since June, Google is up nicely too, but Microsoft has had a stunning few months, shares almost up by a half since January.
The rise of Microsoft, which may have a lot to do with its CEO Satya Nadella, is down to very solid reasons. The company, with its cloud strategy, and more collaborative way of working, is a different creature to the one during the Steve Bullmer years.
Of course, the recent drone attacks on Saudi oil fields won’t help. I don’t buy into the official US line that Iran was behind the attacks, why would it do something that increases the odds of a war with the US? I find the US position confusing. Trump fires the ultra hawkish John Bolton as his national security advisor, suggesting he is trying to avoid war with Iran, while the US Secretary of State Mike Pompeo goes out of his way to blame Iran. President Trump tweets that the US is “locked and loaded.”
Sure, Yemen rebels backed by Iran were probably behind the attacks, but I doubt very much they were acting upon orders from Tehran.
A war with Iran, which many in the US administration seem to want desperately, would lead to a big surge in the oil price — indeed oil is already rising — adding to the inflation fire created by Trump’s domestic economic policies. Higher oil prices could yet tip the global economy into recession, and since inflation appears to be rising, the FED’s ability to ride to the rescue may be limited.
But, setting aside fears of a US/Iran war, which admittedly is quite a big thing to set aside, the last week has been good for the bulls.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees