Can central bankers continue to summon the animal spirits that have propped up markets in recent years? That is a key question that investors returning to work this week face. In a report released this morning, Société Générale global quantitative strategist Andrew Lapthorne noted a “rapid erosion of central bankers’ omnipotence” in market sentiment as the focus of U.S. investment risk narratives shifted from rising growth rates to deflation in recent weeks. Lapthorne and his colleagues note that a critical factor in assessing the macro environment is the recent aggregate lowering in guidance by large-cap U.S. companies in the lead-up to earnings announcements. With European and Japanese risk assets failing to respond positively to accommodative measures from the European central Bank (ECB) and Bank of Japan (BOJ) respectively, market risk narratives are focused on the limits of Monetary Policy as trading resumes after the weekend.
China surprises to the upside. Trade data for China released this morning saw September exports rise 15.3 percent over the same month in 2013, beating consensus forecasts by a significant margin. Rather than registering a marginal contraction as expected, import levels were 7 percent higher year-over-year, according to the General Administration of Customs; much of the surge in imports was directly tied to processing of goods for re-export.
Copper markets buoyed by China. Chinese copper ore import levels climbed for a second straight month, reaching a record 1.29 trillion tons in September, a 34 percent increase year-over-year. Coming on the back of higher-than-forecast smelting data for August in the world’s largest import market, the import data should give a boost to copper futures contracts.
Price growth remains soft in Europe. German wholesale selling prices dropped 0.9 percent in September, a steeper than forecast year-over-year contraction, according to the Federal Statistical Office (Destatis). The price moderation was driven primarily by declines in critical food and fuel components.
Earnings season enjoys a holiday in the U.S. Thanks to the federal Columbus Day holiday, there will be no primary corporate earnings announcements or economic indicator releases today in the U.S.
Portfolio Perspective: The Mitford Sisters Market — Nicholas Colas, ConvergEx Group
Equity markets live and die on several well-established conventions — rules that investors use as the bedrock of their fundamental analysis. The volatility of the last few weeks shows that some of these traditions are now under attack. The questions are many: Do central banks always have the power to tip the balance between growth and recession? Can stocks constantly shrug off recessionary signals from commodity and fixed income markets? And how many exogenous, if largely unpredictable, global events can equities ignore before their collective weight halts a bull market?
Consider the role of central banking in managing the U.S. and European economies. Since these institutions do not link their currencies to precious metals like gold or silver, their credibility comes solely from policy actions that achieve their mandates of social goals such as economic growth, managing inflation and employment. The old chestnut of “Don’t fight the Fed” is an implicit endorsement of the notion that the U.S. central bank controls — or at least guides with a very heavy hand — the American economy and capital markets. Two Fed chairs — Paul Volcker and Ben Bernanke — can claim the most credit for burnishing that reputation. The first tamed long-standing inflation, and the second dragged a near-dead financial system back from the brink.
But — and this is a big “but” — there are clearly rising concerns over how much central banks can really do to engender secular economic growth. In the U.S., equity market valuations of 16 to 17 times current earnings imply further expansion with little chance for recession. At the same time, the Fed desperately needs to normalize short-term rates at something closer to 1 to 2 percent from today’s zero to 0.25 percent. That’s essentially like taking a still-weak patient off life support and hoping he can breathe on his own. The recent Federal Open Market Committee minutes, which include worries over a strong dollar and weakening global economy, don’t read like a promising diagnosis in that regard.
In the end, the most central convention of investing — that asset prices move in quasi-predictable cycles — is the one investors seem to be questioning most closely at the moment. After a damaging financial crisis and difficult balance sheet recession, owners of financial assets have been ready and willing to believe in a long slow upswing for global economic growth and — correspondingly — the price of stocks. The underpinnings of that belief — central bank policy, corroborating evidence from bond and commodity markets and a lack of geopolitical challenges — now seem shaky.
Nicholas Colas is the chief market strategist for ConvergEx Group, based in the company’s New York office. ConvergEx is a leading provider of global brokerage and trading-related services for institutional investors and financial intermediaries.
