E Markets: Follow Through

The key to finding alpha is to know where the beta is – and in a market filled with little economic news, summer vacations and lack of new interest, momentum becomes a key risk factor along with liquidity. Over the last 2 days the USD has washed out long positions with Trump comments against the FOMC hikes and the dollar gains the first driver. Like a golf swing, markets need to follow-through to be believed and go the distance – so the balancing act this morning is about equities vs. politics. Headline impacts aren’t enough.  

Call this keeping your eye on the ball and continuing to swing. US political concerns rose to the front of the worry list last night, but there is no follow through in Europe.

Trump’s former lawyer Cohen plead guilty to hush money payments to two women influencing the election and he is willing to cooperate with Special Counsel Mueller, while his former campaign manager Manafort was convicted of tax evasion, all driving up odds for a US impeachment of the President and driving down the USD, US shares and US yields into the Asia open. This wasn’t sufficient this morning for risk-off and the lack of follow through is the story of the day so far.  Beyond the fact that the S&P500 printed a new record high yesterday, much of the concerns about global disorder from Turkey to China have been on hold with hopes for resolutions as China/US trade talks start later today. One other positive overnight came from a Politico story, which suggested that the Trump Administration is to announce on Thursday that it has reached a ‘handshake’ deal with Mexico in NAFTA talks, subsequently denied by source reports. So the follow-through matters today with the US existing home sales and FOMC minutes likely big drivers for a market searching for momentum. USD has become the turf war reflecting the political angst against the economic momentum. 

Question for the Day:Are markets overvalued? Growth vs. Value was the key last week with value winning as momentum stalled and worries about China and Turkey dominated. This week is the opposite putting the data ahead into keen focus with flash PMI reports from Japan, Europe and the US all a compare and contrast exercise for those looking at macro growth stories to matter. In the interim, we get the reaction function of the FOMC, ECB and others to the present headlines about trade, politics and new record equity highs. The problem of value is like any model, the output is dependent on the input. This chart from Topdown Charts is worth highlighting in that it gets to the heart of the micro world – earnings drive shares first  – and they are in an uptrend.