E Dinner Discussion: First Half, Second Half

Track Research hosted its mid-year idea dinner with an illustrious group of traders, analysts and portfolio managers.This dinner identified a list of 5 negatives for markets and yet ended with many leaving upbeat on the second half with a bit more risk appetite seemingly spurred by the food and wine.There were moments of boisterous bullishness as betting over deserts proved, along with almost abject despair as many saw the decline of Western democracies as inevitable. The role of the USD and the calendar to the mood was also part of the puzzle of where to put risk in 3Q.

The US did have half-dollar coins early in its history – and perhaps that early money and how it was used for explosive growth into the next century is an example of where markets are in 2018. Of course, the role of tariffs and trade back then was just as important and maybe the cautionary side tale of the new Trump economy. 

June Price Action:

Many will be happy to see June go. Price action across most markets has been choppy, volatile, and filled with more fear than greed and yet the drop in mood hasn’t been completely reflected in price. We saw an early rally up in S&P500 fade to near flat at the end of the month. The S&P500 is up about 2% on the year – not horrible given the 1Q theatrics but hardly inspiring.  Emerging Markets have notably suffered from ARS, TRY, BRL and ZAR – bleeding into a contagion with the MSCI EM off 6.5% and the currency index off 2.6%. Turkey led the pain trade this month with the snap election working out but certainty in politics doesn’t mean sustainability.  

The late spring surge led to a stultifying start to summer with the focus on global trade war fears rising – starting with China going into a equity bear market as the Shanghai Composite falls 10% so far on the month, 23% from its peak, CNY off over 3% - with Germany’s DAX down 3.4% on the month, EUR down off 1.5% as focus on Autos and Deutsche Bank dominates. US shares are mostly up though DJIA is off 0.7% while the NASDAQ is up 0.90%.   The VIX is holding 16.70% up about 1.5% from May, still below the 20% fear mark and near the long-term average.

Commodities are another story and one that puts the OPEC increased production agreement at odds with the price, as WTI jumps over 9% back over $72 while Brent is flat. Other commodities reflect trade fears with Corn off 12%, Soybeans down over 15%. Perhaps most confusing for many in a time of rising uncertainty is gold which is off nearly 4% despite fiat currency doubt.

For rates, there was a dramatic turn down despite the FOMC hiking another 25bps and spelling out another 2 for 2018 and more for 2019. 10Y Rates touched 3% twice in the month and then rolled over on risk-off moods at month-end to trade below 2.80% but we seem set to close near the 2.85% levels. German Bunds were much the same as the ECB taper talk but forward guidance on rates had 10Y Bunds over 0.5% 3 times only to see a test below 0.3% at the end of the month. The question to ask is whether trade war concerns are overpriced and growth/inflation underpriced into 2H 2019.

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Dean Gilmore 7 months ago Member's comment

An enjoyable read.