Reversal of Fortune
Risk sentiment has improved significantly since the start of the month as greed has won over fear, despite what we think has been a minimal change in the investment landscape. The primary themes of slowing global growth, low-inflation concerns, the stronger USD and the potential for currency wars, along with the litany of global hotspots, remain largely in place in our view. To be sure, the recent stability in oil prices has taken one of the primary edges from the market, while Greece has also reached yet another resolution with its creditors. We would note, however, that crude is mostly unchanged for the month, down over 9% on the year, and less than half of what it was versus last summer. We also call the agreement reached with Greece hardly a victory, at least from the Greek and non-euro denominated world as the Country’s growth profile has not changed and the perennial can has once again been kicked. In fact, given that the agreement provides only a temporary four month grace period, we have no doubt that we will be writing about Greek dramas and tragedies again. For the moment at least, the market has once again put on its old comfortable risk-on glove, with U.S. equities once again establishing new highs as rates have returned over half of their January gains. Given that we think the ongoing themes of monetary divergence remain in place, we are hesitant to signal the all clear and point to the continued outperformance of many asset classes that are directly buoyed by dovish central bank action and rhetoric. In particular, many European bourses are up over 10% for the year, while the Nikkei and Australian bourses also have YTD gains in excess of 6%. This compares to the 1-3% YTD gains for U.S. stocks. While we interpreted the Fed minutes and part one of Yellen’s congressional testimony as more dovish leaning, the focus remains on when lift-off will occur, not if the FOMC will pull the trigger. From this perspective, the odds of a June rate hike continue to diminish, although we continue to think that Sept/Oct is the most likely outcome.