Trader's View - Global markets continued balancing act

The lay of the land

The trade-war looks intractable, the US Federal Reserve is insisting its “patient”, global economic growth appears late cycle, and international geopolitics is fraught with danger. At the highest level, the factors enumerated constitute the world we live in; and for financial market participants, make-up the broad environment within which trading, and investment decisions must be made. Looking at these themes, on paper, it doesn’t fill one with a great deal of confidence. The macro-economy appears risk laden, and whether it truly really reflects reality or not, the dynamic is insidiously sapping sentiment in the market (albeit marginally) nonetheless.

Doomsayers keep circling

Despite the clear headwinds, many of which that have been present for months, if not longer, risk assets have generally prospered. And that, for many, is the confusing point. Numerous explanations have been expounded for why global equities are roaring in the face of such challenges. Some continue to call the bull market’s imminent demise, proffering evidence in every tangible event, no matter that event’s essence, that signifies the “beginning of the end”. And such scepticism, if not outright cynicism, for where financial markets are presently place is understandable. However, though perfectly logical, such ideas have proven patently untrue.

Anxiety high, but so are risk assets

Is it just another sign that financial markets have become divorced from reality? Or is their something within reality that market participants can-not see? There remains a sense of foreboding that there’s playing out a tip-toeing towards some large, high-impact even that will correct such contradictions in the market. Though it remains questionable if this is rational or not. Practically since the GFC has there been a chorus of pundits screaming “the-end-is-nigh”. But they’ve been proven false on almost every occasion. The good times seem to roll in the grand scheme of things, with the market’s fruits going to the calm and patient.

Central banks remain supportive

Granted, some sage policy tweaking from central bankers have averted these purported cataclysms. In every truly monumental market event in (at least) the last 10 years, central bankers, and especially the US Federal Reserve, have leapt in with intervention to straighten the course of global markets when any sort of catastrophe appears imminent. Undoubtedly, when history is ultimately written, and the story of the times retold, these high-priests of the market will be the protagonists. The curiosity is whether these high priests will be venerated as the financial worlds’ saviours, or despised for causing, prolonging and compounding whatever disaster eventually befalls us.

The overnight mini-narratives

Such speculation about the future could go on forever. And perhaps, for all intents and purposes, it will. But there is a particular relevance of these ideas, given then events of the last 24 hours. The US-China trade war continues to get nastier, with US reportedly seeking out ways to backlist more Chinese tech companies, threatening global economic growth in new and pernicious ways. And the US Federal Reserve released their minutes overnight, and implored that while they see the US economy continuing to perform strongly, their default position right now is to remain “patient”.

Rates and stocks communicating different things

As it stands from a macroeconomic perspective, it’s the interplay between what impact the trade-war will have on global growth, and what action the US Federal Reserve will take in the future, that will form the core of financial market activity going forward. Global equities have pulled back from their most recent highs, and though clearly resilient, appear to be vulnerable to some further downside. Fixed income markets are manifesting signs that the markets aren’t excited by the growth outlook, increasingly pricing in central bank policy easing, and a global economy nearing the end of a cycle.

Waiting for earnings growth to turn

All manner of things could reverse this trend. However, there does appear to be a major force guiding global markets on this path. The key for stock market bulls is how long solid, but likely slower US economic growth can sustain positive earnings growth, and therefore further upside for Wall Street equities. Easing global monetary conditions will do all it can to drive flow into equities and keep this bull run going – just as it has for a decade. But all the easy money in the world means little if earnings growth can’t keep pace because of a major, trade-war exacerbated economic slowdown.