Judging by the comments from most analysts and commentators, global equities are the place to be and equity markets are still doing well. This is certainly true if you look at Japan, but in general it is not exactly correct. On a 1 month basis, even the otherwise resilient S&P 500 is now flat and many stock markets are down significantly. Indeed, despite widespread investor optimism we are now seeing broad based weakness on a monthly basis.
Germany remains the proverbial strong man of Europe, but we are skeptical that this is a fitting moniker. Looking at exports, it is now clear that Germany and thus Europe continues to see weakness. The total value of German exports has now clearly rolled over from its peak in mid-2012, which coincides with the share of total exports going to China.
France looks increasingly like it is slipping into recession. It is the poorest performing core country – an increasingly inapt label. Highlighting this are the latest PMI numbers. The services PMI, already woefully depressed, slipped lower last month, to 41.9, lower even than Spain’s. The manufacturing PMI was barely much better, falling to 43.9.
We have pointed to the Canadian housing market boom and subsequent bust on several occasions in our reports to clients. Canadian households are overlevered and the housing market has risen to new highs. However, we are now starting to see decisive signs of weakness and consequently and unwind of excess froth in the Canadian housing market.
The aggregate real global policy rate is still firmly negative due to the commitment to low interest rates in the major G4 economies, but we are seeing notable divergence between economies. The UK remains a textbook example of stagflation while real rates also differ markedly between emerging economies.
The Argentine writer Jorge Luis Borges has a short a story about two lifelong rivals, villains to the core, who are finally captured by the authorities and sentenced to death for their misdemeanors. The officer in charge of the execution, a gambling man himself, challenges them to one final act of mutual defiance. He proposes they should have their throats slit, and then race to see who can get the farthest.
With the US stock market continuing to grind out new highs, some commentators have cast doubt on the usefulness of so-called macroeconomic surprise indices as a tool for predicting the market. To add weight to the argument, these commentators even include the proprietary holders and creators of the indices, Citigroup.
We would certainly agree that looking at any one tool will always give false signals and lead to poor predictions. The ongoing divergence between a negative macroeconomic surprise index and a rising 3 month change in the S&P 500 is not a good short term sign for the stock market.
The Euro is making headlines again, this time not due to its possible imminent disappearance as a currency but rather as a result of what many regard as its undue strength. Last week’s press briefing comments by ECB President Mario Draghi to the effect that “The exchange rate is not a policy target but it is important for growth and price stability,” had put markets on their guard that the central bank was taking note of recent currency movements, and especially those vis-à-vis the Japanese yen.
Brazil and Spain have both come off their upper trading range bands. Other indices still look overbought