Vigilance not complacency the order of the day

Sell on the rumour buy on the news, is an adage often bandied about in the corridors of trading floors. Trump confirmed last night that he intends to put a 10pct tariff to 200 bn dollars of goods imported into America from China. Ahead of this, there was some speculation last week that Chinese and American politicians will attempt negotiations. This move feels like president Trump wants to keep up the pressure on the Chinese to come to that negotiating table.

Equity markets in Europe hardly moved on the news, indeed Asian markets including the Shanghai composite rose over 1%. Equity markets in America seem to be struggling to push on further as the NASDAQ index lost almost 1% on Monday.

Post the Trump announcement the trade war news could go one of two ways. It is possible the next news could be the start of negotiations with the Chinese, on the other hand, the Chinese may retaliate and further escalate matters. Markets may react more to the next news flow.

Where the money flows the markets follow is another adage. Recently the money has not followed the market move. Interesting article by Callum Davis on the website pointing out that a divergence has opened between the S&P 500 and the cumulative level of fund flows into US equities. The last time this happened Mr Davis points out was ahead of twin corrections 2015 and 2016. Mr Davis also goes on to point out funds continue to flow into bonds. According to the Investment Community Institute data 73 billion dollars have come from equity funds in the first half of the year.

There does seem to be an understandable correlation between fund flows and market movement a divergence would suggest technical rather than fundamental reasons for the continuous rise. Possibly the resumption of share buybacks post the end of reporting season may be one reason. On the positive side, if there is a correction it would suggest there is money on the sidelines to invest.

It may also go to prove this remains an unloved rally as headlines in many papers continues to focus on the current risks within the global economy. Reliving the ten year anniversary several analysts have recently expressed the view that should another recession come along it will be deeper and harder than the last as central banks will have less ammunition to act. A lot of the troubles in 2008 came about from complacency and greed by many parties.  One does not get the sense yet that either of those elements is currently in place. It would be hard to accuse central bankers of being complacent, vigilant comes more to mind.

Posted on September 18, 2018 .