E March On

The start of March is always an important test for markets. In 2018 March confirmed that February volatility and selling was a bottom. For 2019 many fear the opposite. The calendar of events ahead sets the big picture tone for markets now as many see less obvious value plays in equities or bonds. Less hawkish central bankers aren’t sufficient to cap rates anymore as the US and UK markets showed this week. The risk-on mood has limits as well with many now wanting confirmation from the real economy as green shoots need to lead to real growth. The drive of geopolitical concerns over economic ones continued last week with focus on US/China trade deal hopes, UK political shifts driving risks for a hard-Brexit down and opening up another referendum or delay along with a new election. India/Pakistan and their skirmish over the Kashmir scared many but remained contained with no nuclear fears. The US/North Korea summit ended early but there were some deals – as the US/South Korea agreed to end joint military exercises. All of these stories matter as they were supportive for risk. The tail-risks of December have been unwound again. The outlook for March rests on those risks remaining in check along with a few new fears – like EU elections or US internal politics. Overall, the seasonal push for March will be competing with these fears. 

This is clear from the weekend headlines which center around European politics – and in the week ahead with China growth targets and US jobs likely leading market focus. Expect the month to pivot around the UK Brexit deadlines and the US FOMC meeting March 20-21.

1) Spanish election sets up as a battle against populists. Spain’s socialist PM Sanchez is gunning for a win on April 28, even as he has been the shortest serving leader in modern times. The battle he wages against the far-right PP and the liberal center Ciudadanos Party rests on his coalition building acumen. 

2) Portugal PM warns on China investment screening. One of the biggest winners from China investment, Portugal, labels the latest new regulations on non-EU investment as protectionist. This counters efforts from France and Germany and the larger push from the US. 

3) Banks need more external checks on loans according to Basel committee after UK Metro Bank issues. According to the FT report Bill Coen, the secretary general of the committee noted: “Auditors should be given responsibility for checking banks’ calculations to minimize the scope for errors or cheating,” in a sign that the crisis at the nine-year-old bank is reverberating around the industry.

4) German public sector pay rise could support growth. Unions representing about 1m German public sector workers have agreed to a deal that will mean pay rises by 8.8 per cent over the next three years. The deal covers workers in all German regions except the state of Hessen.

5) Estonia election focus is on rise of far-right against centrist parties. Nearly half of the 880,690 eligible voters had cast their ballots by midday on Sunday, including 40% who used e-voting in advance polling. A poll collating e-voters and those intent on using paper ballots on Sunday suggests a tight race. The Center party of the prime minister, Juri Ratas, scored 24.5% support, narrowly trailing the liberal Reform party led by the former MEP Kaja Kallas with 26.6%, according to pollster Kantar Emor.

Question for the Week AheadHas the US peaked for the year? The weekend US President Trump speech at CPAC in Maryland and his comment on the USD is a wake-up call for many investors that have become comfortable in the lower volatility, higher equity world so far delivered. The 2018 lessons for the USD and markets have not been lost.

“I want a strong dollar but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said Saturday. He continued to complain about Fed Powell policy as he referenced “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.” This push from the US President is the same as December 24, which led to a significant risk reduction for the S&P 500. US divergence on growth and rates is in play for 2019. Many see the outperformance of the US markets – second only to China – so far as the key risk for the next month. The US fears drive not only on Trump tweets and speeches or his political backlash in Congress but also on the economy and corporate earnings. The role of the USD in how Trump operates with China, Japan, and Europe is also in play along with the foreign investment flows. The BOJ shift to focus on JPY and its role is a case in point from last week, and it will be watched as Trump / Abe meet.

1) US earnings – S&P500 earnings are forecast for 2019 at 5.3% down from 24.4% in 2018 according to FTSE Russell. EU companies (ex UK) are expected to see profits at 9.1% and emerging market companies at 13.9%. 

2) Value of US markets  – US S&P500 trades at 16.4 times earnings 12M forward while the Stoxx Europe is 13.4 times and the MSCI EM is 11.5 times according to Refinitiv.  

3) USD overvaluation. The USD is 20% overvalued to the EUR and over 40% against some emerging markets like Mexico and Korea which have brokered US trade deals. The flow of money into US markets may slow on the PPP logic all-else-being equal.  

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