Global Stocks, USD In Holiday Mode

 | May 29, 2017 05:07AM ET

by Pinchas Cohen

  • US, UK, Chinese and Taiwan markets all closed today for holidays.
  • Early-bird-traders took advantage of low volume and drove stocks up, then cashed out. Global markets now are mixed.
  • Yen – the new risk gauge and new dollar gauge – is pinned down, as traders can’t seem to translate recent fedspeak on interest rates and the economy into action.

Equity and debt traders appear to be in a of tug-of-war. On the one hand, over the past six weeks, stocks have pushed higher to new records. This suggests that equity markets at least, believe that global economic growth can absorb higher interest rates—even as early as next month—while moving past US President Trump’s political scandals and the ever-receding likelihood that he can deliver on his pro-growth agenda.

On the other hand, U.S. 10-Year Treasuries are on their fourth monthly rise, fueled by concerns that inflation is disappointing expectations. It would appear that bond traders aren’t buying what Federal Reserve Bank of San Francisco President John Williams is selling when he says that the economy is strong enough to absorb three or even four rate hikes during the course of the second half of the year.

Note that while he doesn’t have a vote on monetary policy this year, he worked closely with Fed Chief Janet Yellen when she was President of the SF Fed, so, he knows how she thinks and may well have her ear. And, yet, there is a narrative among some traders that the FOMC minutes, released last week, revealed a cautious Fed, after the 1Q slowdown (despite Fed Governor Lael Brainard’s emphasis that the global economic outlook is the brightest in years).

Perhaps too, bond traders aren’t sold on global economic growth, following the first indications of a possible Chinese slowdown. Recent data, capped by last week's surprise debt rating downgrade by Moody’s—the first for China in almost a decade—may reflect a reversal of animal spirits. Or perhaps it's just investor optimism, which went wild in the first half of the year, but has been dampened by China's government crackdown on leverage which rendered domestic borrowing more expensive; a decline in confidence among small and medium-sized companies, as well as among sales managers and the steel market.

Not all is doom-and-gloom however. Consumers are still spending, factory-gate prices gaining and home prices continue to defy ominous forecasts.

The bear argument includes a negative divergence between rising prices and lowering breadth, on top of potential complacency, onmulti-decade low VIX readings, on top of high earnings multiples.

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