Rotation trade gives signs of exhaustion

A big week of central bank decisions is coming to an end with the central bankers bathing in uncertainty of the tariffs and the economic implications of the rapidly escalating trade war. The Federal Reserve (Fed) maintained rates unchanged this week, cut its growth projections, lifted its inflation forecasts, said that a tariff-led pick up in inflation would be ‘transitory’ and decided to reduce the pace of QT. Then, the Riksbank maintained status quo while signalling the end of policy easing, the Bank of England (BoE) kept its policy unchanged, meanwhile, the Swiss National Bank (SNB) announced a much expected 25bp cut in an effort to counter the franc’s appreciation when inflation sits at 0.4% on a yearly basis. As a result, the franc and sterling fell on SNB’s rate trimming and BoE’s uncertain outlook respectively. The SMI gained in a session that saw the major European indices offered, while the FTSE 100 closed flat, outperforming most of the European index complex hit by an overall pessimism.

The US stock markets couldn’t extend the Fed optimism into a second session as FedEx – that’s results are seen as an indicator of economic health – lowered its profit forecast for the third straight quarter. The rapid loss of appetite hints that there is a stronger case for a further selloff in US stocks than a sustainable rebound. But the good news is that a period of economic slowdown doesn’t necessarily mean lower asset prices; the central bank policies tend to be supportive of asset valuations in periods of economic slowdown.

Rotation trade gives signs of slowing

Capital flows toward the European equities were the major theme of the Q1 but flows toward the European equities and the euro could start slowing in Q2 as many investors now consider that most of the upcoming European infrastructure and defence spending is already priced in. Consequently, the EURUSD may have consumed its short-term upside potential and could opt for a deeper downside correction before finding the courage to rechallenge the 1.10 offers. Elsewhere, the yen is softer this morning against the dollar on the back of softer-than-expected inflation figures in February. The US dollar weakness that started by mid-January could be gently coming to a bottom and we could see a rebound in the US dollar across the board.

Another leg of the rotation trade is also showing signs of weakness this week. The Hang Seng index was down more than 2% yesterday and shed another 2.40% today on the waning stimulus-backed purchases and the tariff shenanigans. Chinese technology stocks have room to close the gap with the Nasdaq 100 stocks for the next three months but the gains could be vulnerable to a global selloff.

Appetite loss and rising inflation expectations back oil and gas stocks. While oil companies are dealing with lower oil prices, they are lucky enough to be in a sector that will be explicitly be supported by the Trump administration for about four more years, they pay good dividends, they offer strong buybacks, and they could simply ditch their expensive plans of green transition to focus on money-making traditional fossil-fuel business. SPDR’s energy sector fund has been outperforming the S&P500 peers since the beginning of the year and should see stable inflows from investors looking to hedge against the risk of surging global inflation.