Midlincoln February Strategy

  • Year started very strongly. Most of the markets were up in January except or Zimbabwe, Mauritius, Philippines and Egypt. US bonds higher yields have been signaling that some sort of effect for equities was on the cards, and the selloff in the beginning of February was not unexpected. Robots customarily overreacted. But it is most likely just a correction given that all charts went parabolic in January. The correction can make charts look more sustainable.

  • January performed Brazil, Russia trade with Kazakhstan and Nigeria also participating. This is not yet a very convincing trade, buoyed by the oil price. However the future of the oil price is slightly better in the higher global growth environment.

  • China was also strong performing rebalancing trade as well as china consumer’s story trade. New Silk roads trade is also still on, with China, Kazakhstan, Austria and other central European countries participating. Not yet a part of this trade but even the perennial laggard Ukraine where most of the economy is the black market has come out of the woods and performed.

  • Now when the mean face of the US bond markets scared off few investors, the remaining bunch of investors’ expectations are driven by hopes.

  • Market hopes are a few: there are hopes that higher US yields will not have material effect on stocks in the higher growth environment.

  • There are also hopes that China, China MSCI rebalancing, new Silk Roads and its consumer story will provide cushion for risk appetite or at least for steel price if things get worse.

  • There also hopes that oil price levels will be immune to large correction in risk appétit.

  • There are also hopes that military conflicts will be contained but gold will be immune to higher rates and possibly buoyed by occasional geopolitical risk spikes and demand.

  • And there are hopes that emerging markets central banks will provide some clever instruments to maintain liquidity in their countries in the environment of higher US rates.

  • While it was not too difficult so far to trade in the markets where the expectations are driven by hopes, It will be more volatile going forward as some hopes will prove impossible.

  • US dollar price is a mystery. While US dollar is weaker, providing more evidence that risk appetite is still there. It does not provide US with armor in currency wars; it is still stronger against Chinese Yuan, buoying gold, oil, steel and euro.

  • Dollar is probably reacting to US new administration not yet very successful attempts to increase its global reach out everywhere from North Korea, Iran, Kazakhstan, Russia, Ukraine to Syria and Middle East, shifting focus from just middle east. Dollar weakness is reflected in the US limited ability to influence global events due to emergence of many other forces and players all pursuing their own interests, with little focus on nuclear non-proliferation, democratisation or counter terrorism.

  • G20 moves reflect much better the scent of the times. Upcoming Olympic Games is another informal version G20 meeting. Russian Olympic ban is especially acute in this line of comparison.

  • For years Russia has been trading its geopolitical influence with the west. When Russia gave up some of its influence it gained in the economic sense from better integration and when Russia tried to get more influence the integration got sacrificed. Last time, however, it was integrated at the unfortunate instance, when its economy was mostly oil and gas and industry and financial sector nonexistent. Some disintegration from the west is now aiding Russia to rebalance its economy.

  • Anticipating higher US dollar rates and lower emerging markets Eurobond prices, fragility of the new emerging global organism is more evident. Central banks are likely to take larger role substituting dollar credits with local bonds when leveraged Chinese Eurobond borrowers are confronted with stress. And some central banks are even likely to be successful shrinking share of dollar credits in global bond markets. It is difficult to see equities higher with this inputs, more of equity is likely to be swapped for debt or just issued anew to finance growth. But debt now is so much more expensive then equity, not sure where the equilibrium will set in and what will be the effects on WACCs and discount rates is a complex math.

Idea In the Report