Bull vs. Bear
US stocks increased on Friday, despite record-breaking declines in retail sales and industrial production in April (more below). US10Y treasury yields rose 2bps to 0.64%. Oil rose a further 6.8% amid signs of a quicker recovery of demand in China and a faster than expected return to regular driving habits around the globe as consumers emerge from lockdown.
Still, risk assets are getting held back as investors continue to peer over their shoulders at the escalating tensions between the US and China. At the same time, Australia's trade minister has noted that requests to discuss trade issues with China have gone unanswered.
Ultimately, however, investors remain focused on how quickly economies return to usual, and therefore how fast EPS normalize.
Much like last week, Fed Chair Powell's testimony before the Senate Banking Committee on Tuesday may overshadow what’s likely to be further weakness in the week's economic data, something that the market, for the most part, has become incredibly desensitized.to. Chair Powell will appear with Treasury Secretary Mnuchin to provide the first quarterly report on the CARES Act.
While risk assets have been buoyant, expect policymakers to strike a more cautious tone, emphasizing that we’re not out of the woods yet and that there’ll be more stimulus in the offing. The key for policymakers at this critical stage of the recovery is to keep throwing big numbers out there and worry about the details latter. No one will care if you don't need to use them if some semblance of a V-shaped recovery does surprisingly unfold.
US Retail Sales
Retail sales posted its worst month on record but influenced sentiment with little more than a feather effect. When you tell people they can’t go out and shop it tends to have a dampening impact on buying stuff, so everyone expected Friday's US retail sales report to be calamitously poor. But it seems as though few are looking at the details and details are what matter. Looking at the headlines distracts from what is going on underneath the hood: People aren’t going to the mall, but they are buying a lot of things online.
China's retail sales are super important
On the other hand, China retail sales data was hugely crucial as it gives us a glimpse of life post-lockdown; the US data during lockdown, not so much.
And the China data underlines the problems facing the global economy post lockdown: It’s one thing to reopen, but another getting people back out and spending. Given that it’s consumers that have been an instrumental driver of growth in several of the world's most significant economies, that’s going to be problematic.
Indeed, economic data from China for April suggest that it’s easier to get factories going than it is to get consumers up and running. Crucially, end-consumption (including beyond China) needs to pick-up in short order, otherwise the nascent recovery in industrial output will also start tapering off.
But, in contrast to the US where the data remains mired in the lockdown period, China's April activity data show a rapid recovery from the lockdown shock and high-frequency indicators are showing a notable improvement.
Although the headline retail sales came in worse than expected, dining spending remained the weakest link, shrinking -31% y/y. If dining is excluded, retail sales are not far from last year's level in April. Notably, auto sales have rebounded well, while food and telecom equipment sales recorded double digits growth in April, and the ongoing credit boom will likely provide strong support to China's economic recovery ambitions.
Buy the dip
At the moment, every single dip across financial markets is being bought into relentlessly by investors. Easy money, cash on the sidelines and signs of lockdown restrictions easing are all helping to keep risk markets well bid.
In a way, last week's sell-off – triggered by a nasty trifecta of a resurgence of Covid-19, grim warnings from the Fed chief and a revival of the US-China feud – and stunning reversal underlines how many people are lining up to buy stocks.
I’m sure most are finding it difficult to make much sense of markets at the moment, but overthinking things is the real problem at the moment. As I mentioned the other day, we’re basically all trend followers now, so it’s just a matter of getting on board or sitting it out.
The perma bulls are buying for 10-20-year horizons, so they like the dips providing tremendous downside support due to the FED easy money policy.
The US equity sell-off last week took us to levels seen at the start of May, which then saw the market bounce 6%. Is it any wonder people are just revisiting the same playbook?
US data without a purpose
I’ve been harping on ad nausea about how pointless the jobs data is these days due to the difficulty in compiling and producing accurate numbers. It’s terrible – we know that – but what’s important is not how bad it is today, but how quickly it recovers post-lockdown.
Connecticut said that it had misreported the number of claims by around a factor of 10. Continuing claims data was also questionable and influenced by an unadjusted 1.9m drop in California – an almost 40% drop in the prior week. One problem is the lack of any uniform approach across states. As Bloomberg notes, "In many states, a person who has already filed an initial application needs to file continued claims each week to receive funds while remaining unemployed. In California, residents file every two weeks."
Druck and Tep
US heavyweight investors Stan Druckenmiller and David Tepper both weighed in on the subject and said the S&P was over-valued and gains had got out of hand, making for much more oral argument from both sides of the debate.
The two probably reflected market opinions in Europe and Asia rather than the US. The bull/bear divide is pretty much down the middle of the Atlantic; US seems bullish, Europe bearish and in the Far East, which typically runs US proxy sentiment, the trade war rumblings have Asian investors worried. And Europe is in its usual state of disarray as investors continue to shake their head in dismay with most expecting a flare-up of tensions one way or another – ECB vs. GCC vs.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll