You are here
Scares ahead in global trade and markets, but little danger of zombie apocalypse
STOCKS fell slightly last week as the battle royale between the bulls and the bears continued.
This week, a rebound seems likely as the on-again, off-again deals between the US, North Korea and China head back in on-again territory.
Breakthroughs on these negotiations would strengthen the hand of bulls who argue that wobbles in global stocks, bonds and currency values are merely nerves and that stocks will rise for another year, at least.
It sometimes feels that US President Donald Trump has the markets on a leash. Recently, he has jerked the leash in all directions - often at the same time. Last week, he trashed his own diplomats' trade talks with China, yanking the stock market downward. Now, with a dispute over telecom concern ZTE close to resolution, a trade deal seems closer.
Mr Trump rocked markets when he cancelled his summit with North Korea's Kim Jong Un. Now Mr Trump shows signs of relenting on that decision after Mr Kim's administration struck a conciliatory tone.
Then came Mr Trump's warning to the European nations that he may impose tariffs on imported cars. That would deal a damaging blow to Germany, which exports tens of billions of dollars worth of Mercedes, BMWs, Audis and Volkswagens to the US every year.
While most economists agree that Mr Trump has a point when he criticises Chinese trade policy as unfair, the decision to open a second front in the trade war against Europe is more of what Trump watchers call "a headscratcher".
Tim Shirata, executive vice-president of money manager Guild Investments, however, believes a major trade war is about as likely as a "zombie apocalypse." The money manager said investors who fret about the diplomatic clashes with Germany and China should reread The Art of the Deal.
"The core of that style is to open negotiations with extravagant demands, and even with bluster and intimidation, and then moderate those demands as negotiations proceed," said Mr Shirata in a note to clients. "The hoped-for result is to reach a more advantageous settlement than would have been reached with a more modest opening gambit. "
Mr Trump's approach leads to market volatility, but it's also "one that sometimes produces good results, and sometimes backfires, and we have seen examples of both since January 2017," said Mr Shirata.
Mr Trump is not the only world leader who seems to enjoy keeping markets on their toes. Saudi Arabian and Russian energy officials have indicated they will coordinate an increase in oil production, removing the "caps" that caused oil prices to more than double over the last 18 months.
Oil futures saw one of their biggest plunges since the commodities bust in 2014. As on that occasion, a rout for oil prices could ripple through other commodities markets. Indeed, the Baltic Dry Index, which tracks the price of shipping grains and metals fell sharply last week.
In the meantime, other crises are rumbling on the horizon like distant thunder. Italy looked set to appoint a prime minster who has pledged to either quit the euro zone or extract a hefty discount on its debts from the European Central Bank. Either one could sow chaos in Europe and global financial markets.
Those who are sceptical about the outlook for the bull market, including Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund, point to brutal selloffs in emerging-markets currencies. Nations like Turkey, Argentina, South Africa and others often have to repay debt in US dollars. When the dollar appreciates rapidly, as it has done in the last six months, investors become skittish about these nations being able to meet their debt payments.
The Turkish lira has fallen to its lowest level against the dollar, stoking inflation fears even as the central bank there imposed an emergency rate hike to shore up the currency.
Volatility in the technology sector also threatens to persist. On Friday, the new GDPR, or General Data Protection Regulation came into force, empowering European regulators to levy fines on tech companies and other Web site operators that break certain rules on protection of customers' private information.
Facebook and Alphabet's Google are vulnerable to fallout from the new European regulation, or potential copycat laws in the US or elsewhere.
Economic data is also somewhat uneven. Orders for goods designed to last three years or more declined in April, according to the Commerce Department, although an underlying measure of business investment advanced.
Both new and used home sales reports revealed a slowdown in housing-market activity, likely related to the increase in mortgage rates.
There was some reprieve on that front last week. The Federal Reserve's minutes indicated officials were likely comfortable with inflation overshooting their targets. That was a surprise twist on assumptions that the Fed was in inflation-fighting mode and pushed the yield on the 10-year Treasury note back below 3 per cent.
Friday's May jobs data could change the outlook for interest rates again. That's why investors will focus on the wage-growth element of the report, which is what the Fed would react to.
"There's this anticipation that, at some point, we are going to see wages moving higher," said Quincy Krosby, chief market strategist at Prudential Financial.
Wage inflation could force the Fed to become more aggressive. That would play into the bear case on everything from emerging markets to US economic growth.
"In our view, the weaker wave is confirming a soft patch rather than signaling a global recession," said economists at brokerage Bank of America Merrill Lynch Global Research, in a note to clients.
"The markets have also been jittery: we will be watching confidence indicators for signs of pass through to the real economy. We continue to expect stronger growth in the second quarter, particularly in the US as fiscal stimulus kicks in."