A stopover in the flight from risk

Summary

European investors are kicking the tyres of the stock market bounce and it’s fairly solid.

China trade artefacts to the rescue

Positive values sustain approaching half-session point after a partial fade. Friday risk rallies are a structural oxymoron at the best of times. In a dramatic week like this one, the notion that it’s usually inadvisable to stay exposed into the weekend may come into focus. Whilst shares in Asia ended with a sea of green, there was another searing sell-off beforehand. The firmer close owed a little to fortunately timed Chinese trade data. Readings implied a surprise rebuke to protectionism. Exports surged 14.5% on the year, the fastest since February, with a new record surplus vs. the U.S. at $34.13bn. But even with a trade-weighted renminbi discount of 3.3% this year (close to half the yuan’s fall against the dollar) exports would be defying gravity if they stayed this robust in months to come. Signs of front-loaded inventory abound as well, suggesting volumes in certain categories could fade fast with higher U.S. duties on $200bn in Chinese goods in place since 24^th September. Import growth notably slowed faster than forecast to 14.3% on the year against 19.9%.

Indian Summer session in Europe

So, there’s an ‘Indian summer’ feel to trading for the FTSE, FTSE MIB, DAX and others. The line-up of outperforming sectors is well in line with tariff-sensitive and China-destined resource pattern of late. Resource producers lead STOXX sub-indices as theirs rises almost 1%, a mechanical reflex following improved Asia-Pacific sentiment. Ambivalence over banks returns. That gauge trades slightly behind mining and metals shares ahead of earnings from dominant U.S. lenders that are expected to be largely robust. Bank shares have proven to be just as prone to yield volatility as the overall market, so will be no haven should investors flee again. Auto and parts shares are close behind. Most of the market overall is at least slightly in the black. It’s a broad-based retracement, though it lacks underpinnings that outweigh ongoing pressures

BTP/bund spread ticks in

The dual yield challenge that has gutted stock market sentiment is on a pause more than a fade. The benchmark yield in Italy has not been below 3.449% since a brief BTP bounce on Wednesday that was almost certainly driven by profit taking. This keeps the spread to Europe’s benchmark borrowing costs no more than 20-30 basis points below the widest in five-years breadth it reached a day ago. Another reason for equity investors to remain wary.

“Crazy” like the Fed

Perhaps the uplift in U.S. benchmark Treasurys is slightly more convincing. The yield has eased 14bp since a post Columbus Day 3.2614% seven-year peak, though it has swung higher this morning to stand at 3.17% at last look. Trump repeated trenchant criticism of the Fed again late in Thursday’s U.S. proceedings. To the extent that the U.S. President strongly dislikes impacts of tightening there, he may be pleased his comments resulted in a minor loosening of market rates. He may also have helped soften the dollar index, which is down 1.3% since Tuesday afternoon. As yet, there is no behavioural or economic signal that suggests the Federal Reserve will at some point steer policy in the direction the White House wants. As such, whilst Presidential verbal attacks are likely to recur, the impact on policy should be discounted. In turn, all the conditions that led to the week’s yield melt up and risk meltdown remain in place.