Santa Rally?; Economic cycle orientation; ‘Reflation trade’ propelling stock markets to new highs; Italian political upheaval fails to trigger markets stress – again; Spread betting: ‘Closing the casino’ or FCA spoil sport?
Santa Rally?
Now that market barometers are beginning to flash red with overbought signals, many have begun to ask whether this rally can be sustainable or will reverse even before Santa arrives.
The return of inflation expectations alongside the looming clamp down on Chinese overseas investments have all mobilised money for stock market inflows that previously sat in cash, bonds or abroad. This is not to say that there isn’t a risk that market expectations are becoming a little exuberant and they may fall back if politicians prove to be slower in changing their ways than markets anticipate, or the US$ strengthens more than is healthy for the rest of the world
Economic cycle orientation
Markets’ significantly increased inflation expectations since the summer coupled with improving levels of investor confidence, as evidenced by their rotation from bonds into riskier equity investments, should inform politicians that fiscal stimulus through public investment is what markets are now looking for, rather than fearing.
It is therefore quite possible that the low productivity phenomenon is not the cause but rather the consequence of a far more fundamental issue – an ongoing recession in trust and confidence. Lack of confidence into the future leads to lower long term investments into productive capital, because those who draw up the business cases will ascribe lower certainty of future return of the investment.
‘Reflation trade’ propelling stock markets to new highs
We note that, on each of 2016’s political upheavals, Brexit, Trump and the Italian constitutional vote – whose surprise nature should have been decidedly negative for risk assets – the initial downward risk-off moves were reversed at an ever faster rate, thanks to the relentless demand for equity from investors.
While some investors have cautioned that the recent rally is lacking breadth (i.e. too reliant on a small number of stocks), it appears that at least some of the long awaited rotation out of bonds and into equities (risk assets) is underway. As deflation expectations have receded and inflation expectations re-entered investor concerns, it has created what is referred to as a reflationary environment, and this is leading to a general preference for risk assets among investors.
Italian political upheaval fails to trigger markets stress – again
It was expected that the departure of Renzi would trigger financial turmoil in Italy, with the Prime Minister being the market preference for his commitment to sorting these issues. However, much like the market reaction to the earlier shocks in the year following Brexit and the election of Donald Trump, the oncoming havoc failed to materialise. In fact, beyond even the earlier electoral surprises of 2016 – after which markets had an initial mini-meltdown before recovering (and then some) – the fearful first response was almost completely absent, with the FTSE MIB, the country’s main stock index, gaining 8% since Sunday.
Spread betting: ‘Closing the casino’ or FCA spoil sport?
The FCA has proposed a major clampdown on trading in CFDs and laid out plans to restrict how much risk retail customers are exposed to. They have called for lower limits on deposits for inexperienced traders. The FCA also wants providers to offer standardised risk warnings across the industry, as well as profit-loss ratios on client accounts. These demands triggered a steep sell-off in the sector’s shares, with the share price for the three main providers in the UK market falling by around 30% overnight.
Read the full Tatton commentary here.
