More positive news for equities?
We find ourselves ahead of what could be one of the defining weekends of 2017…
The early showing from the UK local elections (held yesterday) are that the Conservative party have made significant gains, at the expense of both Labour and UKIP.
As I write it’s still too early to call it a Conservative victory. But with the Tories up by +350 seats, against Labour’s loss of -252, it’s starting to look that way.
It’s dangerous to extrapolate these early results and apply them to the possible outcome of the UK general election, to be held on June 8th, but at the same time, it’s also difficult to resist it.
I note that Sterling has strengthened against the US dollar this morning – suggesting the markets are seeing the local election’s result as a good omen for June.
Across the channel it’s the last day of campaigning in the French Presidential election – ahead of Sunday’s second and final vote.
Emmanuel Macron – the “non-affiliated” centrist candidate is still expected to emerge victorious, but his rival, Marine Le Pen, will be hoping her no holds barred performance in the live TV debate will draw voters to her.
As we’ve previously noted, make no mistake whoever wins on Sunday, the French Political landscape has been changed forever – creating further challenges for the EU.
US non-farm payroll data released today…
Moving away from politics, we have the not insignificant matter of the US Non-Farm Payrolls released this afternoon.
This is the US employment situation report and it comes just a few days after the US central bank’s decision not to raise interest rates in May.
And its assertion that the recent slowdown in the US economy, as measured by the first quarter GDP data, was – in its words – “transitory”.
The employment data in and of itself is not that informative in this regard, because of seasonality and frequent retrospective adjustments to the figures.
But the data resonates with traders and, as such, does carry a lot of market sentiment within it.
Last month’s March job creation number (the report is always a month in arrears) fell well short of expectations, with just 98 thousand new jobs created, versus forecasts for the creation of 180k.
The chart below, of new jobs data in Non-Farm payrolls releases, could suggest that we may be seeing a slowdown in the rate of job creation in the US…
Though it might be considered as being a normal part of the cycle, in an economy that has been in recovery mode for the last eight years.
Analysts are looking for gains of 185k new jobs created in April. Anything significantly weaker than that could be seen as a reason not raise US interest rates in June.
That in turn could be seen as further bullish signal for equities, which have grown used to loose monetary conditions – or cheap money, if you prefer.
Any deferment of rate rises is therefore seen as being a short-term positive.
One of the ways we can judge what the wider markets make of the health of an economy, is to consider the performance of its currency – as was noted above with Sterling.
We can get a very clear overview of the world’s view on the US currency by examining the Dollar against a basket of its peers, via what is known as the Dollar Index (which can, and does, act as a sentiment indicator for “USA INC”).
The chart below, of the Dollar Index, shows us clearly that the US currency has run into resistance of late – in the shape of its 200 day EMA line (seen in red).
It’s been unable to reassert itself above this key moving average. And what’s more, the trend in 2017 has clearly been downward for the Dollar.
Which is odd because currencies are, to a large degree, priced on their future interest rate expectations. That is; the higher these are, the stronger the currency should be, other things being equal.
US interest rates have risen twice in the last six months, if only by small increments, and yet the Dollar is well off of its 2017 highs.
Why might this be?
This could well be the answer…
The answer may lay in the price of the world’s most important commodity: Crude Oil.
Oil prices have dipped in recent days, with both the WTI and Brent Crude prices moving below the $50 per barrel mark.
$50 dollars is a sentimental value. It’s a round number, with no specific or exceptional relevance to the Oil industry per se, but it does resonate with investors.
Particularly those who have been anticipating the “reflation trade” that is Government spending and rising prices.
Oil prices are often interpreted as a gauge of industrial demand within both the US and the global economies.
Their rise and fall can also be very influential as regards the sentiment around inflation, which is itself a measure of the level of demand in an economy.
It’s been the supply side of the Oil equation that has been in the driving seat so far in 2017, thanks to OPEC production cuts.
The question now is whether or not the demand side of this equation is up to the task of keeping oil prices on the high side and keeping reflation hopes alive.
One way for the markets to judge this is too look at key economic data, such as recent Chinese PMI figures and US GDP numbers – both of which have disappointed.
So any additional weak economic data is likely to apply further pressure on the Oil price and the idea of reflation. And that in turn might stay the Fed’s hand in June.
Short-term, this combination would most likely be seen as being positive for US stocks for the reasons mentioned above.
But that could change if any slowdown proved to be more deep rooted than transitory.
In fact, the US Jobs data has just surprised us – to the upside – posting 211k of new Jobs in April and a fall in the unemployment rate.
But the markets have barely moved on this news.
I wonder if the weekend has any further surprises in store?