With the longer-term issues seen in the first six weeks of the year still looming large, can recent improvements in financial markets hold?
Jeff Rosenberg discusses this and more
- Come and knock on our door, we’ve been waiting for … the April 17th Doha Organization of the Petroleum Exporting Countries (OPEC) meeting. Fans of Three’s Company will recognize our reference, but for oil the reference is to Saudi Crown Prince Mohammed bin Salman’s April 4th Bloomberg interview where he stated, “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.” Meaning, no production freeze without Iranian participation? “Without a doubt.” Despite reports that Iran plans to not participate in the freeze discussions, the recovery in oil reflects heightened expectations for an agreement on freezing production..
- Is it all about oil? Certainly we could be accused of believing so with There Will Be Blood, our lead 2016 outlook theme. However, we emphasized not only the importance of oil but the broader commodity complex. And those industrial commodities reflect the outlook for China. China’s recent policy response appears to have successfully addressed short-term market concerns. But as we highlighted last month, this leaves—and arguably exacerbates—the longer-run issues.
- Easing the tightening. The Fed eased off of its anticipated tightening much to the pleasure of financial markets, illustrating the global constraints from “normalization” when a surging dollar results. First, the “dots plot” in last month’s Federal Open Market Committee (FOMC) meeting indicated a surprisingly strong reassessment of the pace of normalization from an anticipated four hikes in 2016 down to two. Subsequently, Fed chair Janet Yellen reinforced that view in her April 5th New York Economic Club speech, highlighting that “asymmetry made it prudent to wait.” Easing off the pace of tightening has been associated with a falling dollar and rising prices of risky assets (stocks and credit) and stabilizing commodity prices.
Strategy and outlook
Whether the improvements in March can continue remains unclear. Certainly, the near-term outlook for oil will continue to hold much of the financial markets in its grip. But arguably for the short term, the pivot by China policy to emphasize stability over reform and use its traditional levers of credit growth to stimulate production in infrastructure and real estate, coupled with an effective clamping down on the capital account, has stemmed the tide of global fears for now. As we argued in our tactical shifts upgrading the outlook from February, the longer-term issues we outlined at the beginning of the year and which gripped financial markets for the first six weeks of the year, loom large on the horizon. But for the short term, we’ll keep to a more balanced set of portfolio recommendations, making no shifts this month from those prior upgrades of risk in our portfolio.
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