Global markets: don’t worry about headlines, think about this

‘It is the weight, not numbers of experiments that is to be regarded’ – Isaac Newton

Did you wear a “Dow 20k” hat on Wednesday when the venerable US index not only pushed above that big round number level but stayed above it?

Hopefully not…but I am sure you read some of the exuberance it released in the world’s media.

Now round numbers do matter a little but beyond a boost for hat makers and investment salespeople we should not get too excited.  Share prices go up over time due to general economic progress and inflation – a bit like your pint of milk or loaf of bread.  Remember what Warren Buffett – only the world’s most successful investor – has consistently said: ‘down days I like because we get to buy them cheaper’.

So if market exuberance is not exciting how about Tuesday’s Article 50 centred Supreme Court ruling?  Well…anyone remember what happened to the Pound afterwards?  It basically edged up.  Whilst I do not deny the important constitutional underpinnings to this ruling from a Parliamentary Sovereignty perspective the conclusion from financial markets was a shrug of the shoulders at worst.

[graphiq id=”lwEwJN8Ajqd” title=”Poll: Support for Theresa May’s Brexit Targets” width=”600″ height=”547″ url=”” link=”” link_text=”Graphiq” ]

There is plenty more mileage in the Brexit debate of course to come but European financial markets – and the much maligned euro and Pound – have had a good week.  The reality of a delayed, soft Brexit is not factored into financial markets at all. I am still using lurid Brexit headlines as a buying opportunity.

So if I was not impressed by Tuesday and Wednesday’s headlines, then how about the big Thursday story: “The Wall”?  No, not a rock extravaganza by Pink Floyd but President Trump and his apparent drive to beat China as the biggest user of concrete and general building materials.

Surely this is a precursor to huge angst about diplomacy and trade which inevitably will filter into the financial markets?  Of course it could…but you need to understand the new President first.  Remember what I wrote in last week’s column about Trump talking tough but in reality he is beholden to support from countries like China?

This is the real story and what matters for the wider world (apologies Mexico) in helping to avoid a generalised protectionist push.  As I write later today President Trump meets British Prime Minister Theresa May – and I anticipate a big difference in rhetoric used.  After all a bit of American love and the British Pound goes up against the US dollar…

Now what really matters from all of this is contained in the bond markets.  At the link above I explained why President Trump is constrained by the need to keep the Chinese buying American Treasury bonds.

US Treasuries had a suitably patchy week as new data showed that – once again – demand by foreign investors dipped again.  That sounds to me like the Chinese giving the Americans a little new lunar year present.

Meanwhile in Europe bond yields in France, Germany, Italy, Spain and Austria have broken through 12-month highs as investors focus on the accelerating pace of inflation.

Yes, we know here in the UK inflation will transitorily rise nicely above 3% later this year as the dual impact of a lower Pound and a higher oil price kick fully in, but in the Eurozone the combination of a continuing economic recovery and those higher energy prices are leading to higher prices.

This is great news.  Whether you are pro or anti-Brexit the reality is that Europe is today a far bigger and more influential trade partner for the UK and a return to some semblance of a normal economy in Europe can only be good.

And it will continue because on Friday stories were circulating of a recent internal International Monetary Fund document which apparently noted that “(W)e continue to strongly support the ECB’s accommodative monetary stance and its firm commitment to achieve its price stability objective…Subdued underlying inflation and a still negative output gap point to the need for policy to remain accommodative for an extended period”.

Basically keep that stimulus coming – no wonder bond yields are rising in Europe…and Japan…and China.

In short, forget the round number equity market headlines, the political whatevers and the diplomatic mind games and focus on the bond market shift.  Famously in another political era one heavyweight remarked ‘I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody’.

Too right.

For you and your investments it means you keep holding onto those financial sector shares and gold holdings but also keep the faith that the world will not be a disaster and flop into a protectionist fuzz.  If you want to watch anything – even as an equity investor – then watch bond yields as they tell you all you need to know about that big decision whether to buy/hold or sell your investments.

Chris Bailey has 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’. 

Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only.  Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.