We’re not sure there is much to add in terms of market update this week. In FX and fixed income, it appears to have been a classic buy the rumour and sell the fact around the Fed’s rate rise and equity markets just continue along their merry way viewing everything through some heavily rose tinted spectacles. With not much to add, we’ll keep our comments brief this week.
Starting with US bonds, we are sticking with our view that longer dated US yields are range bound. Economic growth, which improved in the second half of last year, appears to be unable to break much above the 2% level in real terms and as yet, new initiatives from the Trump team appear to be at risk of being delayed for longer than the optimists would hope. The Fed may still talk about three rate rises both this year and next, but the market is still not quite ready to sign up to their more optimistic forecasts.
Chart 1 – US 10 year bond yield; still bound by 2.30% and 2.65%
If anything, European bond yields have been rising a bit more than US yields of late. This narrowing yield advantage along with a somewhat more dovish than expected Fed are making life a bit frustrating for the Dollar bulls. Although we would count ourselves as long term Dollar bulls, we are not pressing this trade at the moment as it feels like the lack of upside momentum will be with us for a little longer. Furthermore, there are likely some stale long Dollar positions that may well need to be liquidated before a more concerted bullish trend can emerge.
Chart 2 – The Bloomberg US Dollar Index
As for equities, despite undeniably expensive valuations, analysts downgrading earnings forecasts, lack of concrete policies from the new administration and weakening market internals, the headline indices continue to move gently higher. As noted last week, the technical position is far from indicating that now is good time to buy, but there is also no clear signal yet that it is time to sell. We remain fully committed to the sidelines.
We have begun to revisit some of our demographic work, and we continue to see the ageing populations in developed countries as a looming headwind for equity markets and a positive for high quality bonds. As we all know, the desire for less risk and safe income only increases as workers first approach and then move into retirement. Frankly, we are surprised that the Baby Boomers have not been more active in selling their equities in recent years. But they will have to sell equities some time and at this point, we are not sure who will be in a position to be on the other side of that trade when it begins in earnest. We hope to discuss this in more detail next week as we think it’s very close to the time when this dynamic will become a lot more important.
Stewart Richardson
RMG Wealth Management
