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The Weekly Track managed-expectations

- The Weekly Track – Managed Expectations by Bob Savage
http://trackresearch.com/articles/the-weekly-track-managed-expectations/

There is a difference between a correction and a trend reversal – and equity markets grabbled with that last week. The market mood swung from anger to anxiety over both monetary and fiscal and geopolitical policy changes. The central fear for the week ahead is that we are in more than a “correction” and that the reversals will eventually extend into bear market territory (ie 20% or more). The search for a hedge – “crisis alpha” remains elusive as cash hardly works in a market filled with more noise than signal. The rise in volatility has made the cost of insurance match the pain of false starts in the chasing of momentum for the next big move. Uncertainty breeds contempt and volatility. All portfolio managers appear to be looking at March with the need to manage return expectations accordingly.

Last week was about the 3 T’s – 1) Technology with Facebook losing value and accounts after it became obvious they use customer data for financial gain with Cambridge Analytica the prime example and after Uber stopped its autonomous car experiments when a pedestrian died. The role of technology in leading up the stock market makes its descent that much more important. Apple shares are held in many portfolios outside of technology and their weakness puts many managers on edge. 2) Tariffs dominated the worry list as Trump unveiled new tariffs on $50bn in China trade and China followed with $3bn. This was a de facto start to a global trade war and set in motion a number of risk-off trades confused by the goods involved in the tariffs. The exclusion list for Steel and Aluminum now includes Europe. The shift from NSA McMaster to Bolton puts the Iran Treaty renewal for May into doubt along with much hope that the Korea talks will work. 3) The last T is for tightening – not j
ust from the FOMC as it hiked 25bps to 1.50-1.75% as expected but also for the tighter rates in spreads with 3M Libor-OIS widening further suggesting the US deficit is squeezing out private borrowers into the 1Q end. Trump signing a $1.3trn spending bill and the heavy US issuance in the week ahead highlight the problem. The mixture of weaker economic data abroad – particularly in Europe – added to concerns that expectations for a concerted global growth acceleration maybe overstated for 2018.

Managing expectations seems to be back as the key factor for central bankers as they deal with pushing towards “normalization” without destroying accommodation. They all want rate hikes to not matter to the real economy. Growth remains the central focus as without it, inflation hopes fail and rates will remain abnormal particularly in Europe and Japan. The politics of it all haven’t gotten much better. Saturday, Italy elected leaders for Lower and Upper Chambers – one from the 5-Star movement and the other from the far-right – potentially moving towards a shaky coalition. In Japan, Abe hangs on by a thread as the educational foundation scandal continues to fester. As for the FOMC make-up, San Francisco Fed Williams is now the favorite to replace Dudley at New York Fed, and Pimco’s Clarida is the leading choice for Vice Chair – both will help soothe some of the worst fears about FOMC policy risks but the job for the central bank remains the same – delivering
credible responses to imminent inflation risks without killing the economy or upsetting markets to the point where consumer and corporate confidence wane.