Market complacency may be its undoing

Welcome to the Q1 reporting season. If you hadn’t noticed yet, Easter came early this year (good for retailers, airlines etc) and there is a minefield of shifting currencies and commodity prices to adjust for as well as some decidedly mixed macro data coming out from the major trading economies. If you’re selling out of a Euro manufacturing base or consuming a lot of energy, then chances are that Q1 2015 is proving a relatively benign results season. For those outside of this magic circle, then perhaps one should think beyond the share buybacks and start applying cheap capital to leverage cost synergies through acquisitions. Fedex buying TNT, Heinz buying Kraft Foods and Shell buying BG are all manifestations of this process.


In a World dominated by QE and its accompanying financial repression and currency wars however, none of this really matters. As long as governments and central banks can sustain the illusion of endless liquidity without flipping their currencies into free-fall and hyperinflation, real price discovery will continue to be crowded out by the carry-trade junkies in what is increasingly a zero sum game of beggar-thy-neighbour. Unfortunately, as with any hard drug addiction, this is a habit that is going to prove difficult, if not impossible for politicians to kick. The consequence of US tapering of QE has been a rise in US dollar and fall in commodity prices as liquidity supporting these asset classes dried up. While the latter has been supportive of domestic consumption, the former has monkey-hammered US GDP growth expectations and with it China, as recent March trade data highlights. In our new world order where good news is bad and the reverse also applies, then falling growth can only mean one thing, the spice must flow again. Forget an early US interest rate increase and indeed brace yourselves for the taps to be opened again. With record oil stocks and the prospects for yet more excess supply to arrive following a possible rapprochement with Iran, why else have oil prices rebounded against this backdrop of falling GDP expectations?


Perhaps perversely, the market’s attempt to discount such an eventuality may be its very undoing. If asset prices remain elevated in the anticipation that the falling GDP expectations will necessitate QE4ever-wherever, then what is going is going to provide the catalyst and political cover for the Fed and PBOC to defer its rate increases and possibly engage in a little surreptitious pumping? Clearly a market dump will need to be engineered first which may well also explain the self-interested warnings from some leading Wall Street banks that a correction may on its way. As the instructions say, “Rinse, repeat”.