Living in the UK and working in the financial sector, it feels like it’s all Brexit and Trump at the moment, interspersed with some economic data and a bit of central bank action. Although the headlines are attention grabbing, the reality is that markets are still kind of going nowhere (which we pointed out a couple of weeks ago), with the US ahead of Europe and emerging markets lagging over the last few months. Our attention is focused on whether markets are about to break higher in the short term, and we also continue to spend a lot of time looking at leading indicators for both the economic and market cycle. It all feels a bit choppy to be honest.
Chart 1 below plots the MSCI World in US Dollars. We would describe what we see as an index that is still in a general uptrend, with price above the 200 day moving average which is still rising. That said, the index is up only 1.7% year to date (positive but hardly a rampant bull market) and appears to be capped by resistance created since the volatility driven sell-off in Jan/Feb. A move above resistance would be viewed as bullish.
Chart 1 – MSCI World Index Price Only
Nearly all the heavy lifting is being done by the US equity market, which is up 4.8% year to date as measured by the S&P 500. Excluding the US, the MSCI World Index (see chart 2 below) is down 4.3% year to date. We see quite a different picture here, with price having broken support created post the volatility driven sell-off in June and trading below its own 200 day moving average which is beginning to rollover. If equity market performance were the sole indicator, we would have to say that Trump is winning.
Chart 2 – MSCI World Index excluding the US
Can this out-performance really be down to Donald Trump’s policy mix? Next week we will see the Q2 GDP report which is likely to show the fastest growth since 2014 and we can only imagine how this will be spun by the White House. With Trump also criticising the Fed, talking down the Dollar and vague talk of more tax cuts to come, Trump is clearly going all out for growth to show the electorate that he is making America great again.
All of this makes for great headlines and occasional political drama, but the main question is whether the Powell Fed will ignore Trump and continue to raise rates and allow the balance sheet to shrink and whether China/Xi stand up to Trump’s tariffs potentially leading to a broader trade war. Frankly, we think Trumpâ€™s economic plans are mis-guided and any short-term victories on the growth front will be followed by broader problems; but those concerns may get drowned out by Trump’s cheerleaders in the short-term.
What also grabbed the headlines on Friday was the appearance of the Chinese National Economic team in support for markets over there. As concerns have increased over a potential slowdown, the intervention on Friday supported equity prices and strengthened the Yuan just a few hours before Trump called for a weaker US Dollar
We can quite easily envisage markets breaking out on the combination of Chinese support/stimulus and a softer Dollar. As shown in chart 1, there is a clear zone above which global equity prices would clearly be back in bullish mode.
However, if the Chinese support is seen to only be plugging holes in the dyke, the Federal Reserve remain resolute in tightening policy and the Dollar rally continues, then markets will struggle to break out and may even slip back to the bottom of the range seen in recent months.
For our part, we will try and ignore the intra-day market gyrations caused by Trump headlines, and wait patiently for signs that markets are breaking out (the US may already have done so as measured by the S&P 500). And whilst we wait patiently, we continue to look at leading economic and market indicators. For example, data for Building Permits (a component of the US leading economic index) and housing starts were released last week, with both some way below expected.
It may be too early to say that the housing market is rolling over, but it is not really adding to economic growth at the moment, is obviously interest rate sensitive and also correlates well with future unemployment rates (see chart 3 below).
Chart 3 – US Housing starts and the unemployment rate lagged by 12 months
Our big picture view continues to be that the US economic cycle is mature and that the Fed risks creating a policy error if they tighten too far. So, the potential interference from the White House bears close watching along with leading economic indicators and signs of deterioration in the more speculative parts of the financial system. Of course, Trump is trying to extend the economic and market cycle for as long as possible, and we need to be attentive to any signs that he is having some success. Markets may be quiet at the moment, but this is a very interesting time in the larger cyclical picture.