Global stocks are lower across the board to start the week, as concerns about Trump's administration to pull off a material tax reform plan finally emerge, pressuring S&P futures some 20 points lower this morning, following European and Asian shares lower, while crude oil prices fall unable to find support in this weekend's OPEC meeting in Kuwait where a committee recommended to extend oil production cuts by another 6 months.
Prime Minister Mark Rutte's Liberals are the evening's big winners: they're set to take 31 of parliament's 150 seats. That's a blow to the populist Freedom Party of Geert Wilders, which fared less well than projections, putting the party in a fight for second place
There appear to be abundant potential sources of global market uncertainty: a CB policy miscalculation, the propensity for political surprises, unanticipated consequences of the first US rate hike cycle in over a decade and the feasibility of Trump’s economic growth agenda, to name a few. However, risky assets for the most part remain euphoric, and the recent hedge mispricing has provided an opportunity for traders.
Looking at the most recent CFTC Commitment of Traders report, BofA makes two notable observations ahead of what may be a volatile week between the Fed's 25bps rate hike announcement on Wednesday, just hours after the Dutch General Election, and on the same day as the US debt ceiling expiration hits.
"With spreads at post-crisis tights, equities making new highs, and new issues oversubscribed, markets are clearly exuberant. But could it be rational this time? We’re not convinced.... sell we think you should." - Matt King
"...the market is now in a longer-term battle between 'economic (data) escape velocity' against the prospects for 'financial tightening ahead of growth'... It will continue coming-back to 'soft data converting to hard'..."
Overnight, Bank of America's Savita Subramanyan became the first sellside strategist in recent weeks to throw in the cautionary towel, and raised the bank's year-end S&P price target from 2,300 to 2,450 to "reflect an increasing likelihood that we are entering the typical later stages of a bull market, during which fundamentals typically take a back seat to sentiment and technicals."
"With a high level of oil revenue spending, there’s a risk of a sharp reduction in the fund’s capital. This could, for example, happen if a global recession triggers both a decline in oil revenue and low or negative returns on the fund’s capital.”
In a relatively quiet session, which may see US traders sleep in a bit after last night's Superbowl thriller, European and Asian shares rose ahead of Mario Draghi’s testimony at the European Parliament, while US equity futures were fractionally higher (up 0.1% to 2,293) after stocks jumped the most in a week, as traders assessed the trajectory for interest rates while scrutinizing every new Trump tweet.
European shares and S&P futures fell amid mixed earnings from corporate heavyweights, while Asian stocks were fractionally higher. The dollar slump continued against all its major peers after the Federal Reserve gave dollar bulls little to be optimistic about. The U.S. currency dropped toward the lowest close since November after the Fed reiterated its intention on Wednesday to lift rates only gradually.
The last 4 months have seen something 'odd' happen in Europe's periphery. Sovereign 'risk' has conspicuously (and rationally) risen as macro-fundamentals have deteriorated - something that we have not seen since Draghi's 2012 "whatever it takes" moment.