Don’t Panic, Buy the Dip
Investors are getting way ahead of themselves in the current “risk off” environment. The end of “goldilocks” theory, which is driving sell everything mentality, does not have a structural support we would need for the pullback to snowball into an extended correction. Markets are pricing in a USA growth slowdown while inflation should continue to rise. “Stagflation” environment generalize weighs on stock prices. However, the thinking that decelerating activity outlook in 2H would pressure elevated EPS, is only marginally accurate.
While the US might be in late stage business cycle, a majority of the worlds, Europe, japan and China are in an early to mid-stage cycle. Our view that weakness in the US will be supported by economic strength elsewhere. In regards to worries over central banks tighten we suspect that fears of the ECB , SNB and BoJ exiting policy earlier than expected is unfounded (option pricing in steep drop in USDCHF and USDJPY on the near term seem just reactionary) . The Fed took years to evolve tightening cycle likely other central banks will emulate this gradual approach. Global loose monetary policy will continue from a relative position in 2018. And this factor support further risk taking.
Crypto sell-off exacerbated by regulation uncertainties
The crypto market sank deeper on Tuesday as the future of cryptos remains foggy. Bitcoin broke its 200dma, which stands at $6,275, to the downside and even fell below the $6,000 threshold during the Asian session. The total market capitalization of crypto assets fell more than $100 billion over the last 24 hours to reach $280 billion dollar. Since the all-time high of early January, more than $550 billion of value went up in smoke. On average, this correspond to a decrease of $18 billion everyday over the last 30 days.
As usual, the fear that South Korea and China, considered as the most crypo-enthusiast countries, will ban crypto-currencies has made investors nervous. This tension increase another notch this week as the Chinese government is on the cusp to block domestic access to foreign exchanges and websites that provide ICO investments. Meanwhile, South Korea’s Finance Minister not only confirmed that there will be no ban on cryptocurrency but said that “blockchain is an important technological breakthrough” and that the ministry “will impose strict regulation for negative use cases of cryptocurrencies”.
Finally, the hearing of CFTC’s Giancarlo and SEC’s Clayton before the Congress could be the final in the coffin for the crypto-market. The two tops market regulators are calling – according to the document that contains the prepared remarks – for a federal oversight for crypto trading platforms. According to the document, there is no discussion of banning cryptocurrencies, but rather to regulate it. Given the fact that neither the SEC, nor the CFTC, has clear oversight of crypto exchanges, this leave investors in the dark as they don’t know what fate has in store for them.
European economy is improving, though inflation target is still expected
Monday was Draghi’s meeting at Strasburg. We’ve had a rather positive signal from the President of the ECB, who confirmed that the economy is growing, but that inflation is still expected. No duration as to when the QE program stimulus in the economy is planned to be interrupted was mentioned (officially up until September 2018). As European January Core CPI Y/Y ended the year at 1.30% (December 1.40%) and EU 10Y Bond yields are maintained at 0.736%, there is clear signs that EU equities have not ended their rally.
Yesterday was a tough day for equities who lost more than 4% in the US and Asia, while the EU remained robust and barely lost 1.26%. In the context of strong risk-off and US Government Bonds yields at 4 years high, we’ve surely assisted to a big shift in US investors’ portfolio allocation.
Accordingly, in the context of a weaker greenback, we see that EU inflation will be partially suppressed and Bond yields maintained at these rates, supporting continuous stimulus in the economy. For these reasons, investing in European market remains attractive for investors in the coming periods.
