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The Weekly Track crunch-time

- The Weekly Track – Crunch time by Bob Savage
http://trackresearch.com/articles/the-weekly-track-crunch-time/

We all have them and we all dislike them – deadlines – we are in that period of time where markets have a host of such events creating a crunch time effect for the weeks ahead. There are plenty of worries and yet more cash than fear drives equities back to just a few percent of January highs. The risk-on mood has been linked to the Goldilocks news of central bankers waiting it out, inflation being tame and growth being robust. The week ahead will be viewed by that storyline – whether we remain not too hot or too cold determines the margin of change in asset prices. There is a balancing act for rates and shares, oil and the USD that matters. The list of crunch events is worth considering as we grind into the middle of May without the usual seasonal baggage of “selling” and “waiting.”

1) NAFTA. Last week Speaker of the House Ryan put May 17 as the deadline for a NAFTA deal. U.S. Trade Representative Robert Lighthizer has indicated he needs a deal this month but hasn’t publicly identified a particular day.

2) Inverted US Curve. The US yield curve could invert in September if the FOMC hikes as expected by the market two more times. The neutral rate for rates is still in debate with some on the FED seeing 2% or below. St. Louis Fed Bullard comments last week were notable in highlighting this risk.

3) Italian Debt. Despite the worst fears, a 5-star movement government has pledge to respect the EU deficit rules and the new government coalition with the populist right won’t seek to exit the EUR. The focus will be on the next PM compromised – not Di Maio from the 5-Star or the League’s Salvini – with Massolo, board chairman of Fincantieri, the front-runner. Italy maybe able to skirt the worst fears about pulling out of the Eurozone but its unlikely to be able to hide from its mountainous debt and the need for either inflation or growth to get it manageable again.

3) Oil and demand destruction. Oil and the relationship to consumers will be key focus with US retail sales as oil price rises counterbalance any tax cut effects. The rise in oil prices follows a year of OPEC production output cuts, significant global growth and disruptions from places like Venezuela and Libya. No one is sure where oil prices matter to consumers but the crunch time is far closer now than at $40 bbl.

4) End of cycle indicators. The global M&A cycle in is potentially flashing sign for late economic cycle. European M&A hits 10Y highs. The US isn’t far behind. Markets are watching for signals that peak earnings are in play along with peak growth.

Looking at all the parts of the market in the last week – oil price rises are reaching a limit where many expect to see pushback and pain. Some of this is about Iran/Saudi conflicts, some of it is about wages and consumers, some of it about emerging market debt and growth. The fear factors for 1Q haven’t fully fed over into 2Q but the vulnerability is in US rates and policy still.

The risks for the markets in May remain in financial conditions – with USD gains, rates holding and stocks zooming leaving the market not yet afraid of FOMC hikes. The tightening of US financial conditions maybe facing a crunch time for such in September, but not yet for June.