“Different markets sending different signals.
That’s the gist of BofA Merrill Lynch rates guru David Woo’s latest report – titled “The impossible trinity: A tale of three cities” – which begins like this (emphasis added):
The commodity market is saying global growth is slowing. The US equity market is saying US consumers are still going strong. The FX and European sovereign markets seem to believe Mrs. Watanabe is about to embark on a global shopping spree. We think it is unlikely that these markets will all turn out to be right. Something will have to give and a major re-alignment of the markets, the odds of which are rising, will probably not be either smooth or benign, in our view.
“It is probably an understatement to say that lately it has become more difficult than usual to read markets,” writes Woo. “To the extent that these themes reflect market expectations of reality, there seems to be three different versions of reality right now.”
With regard to the first version of reality – that which is evidenced by the commodity market, which has sold off hard in recent weeks and months – Woo says “the body of evidence suggesting that the global economy is slowing is growing almost every day,” making the idea of a global slowdown “difficult to refute.”
Here, Woo points to China and its recent release of weaker-than-expected first quarter economic data. In the past, he says, investors usually took weak data as a sign that Beijing would “unleash more stimulus” on the Chinese economy in response.
“This time around,” he writes, “things may turn out differently as the strong momentum behind recent home price appreciation may hold back policymakers from easing quickly and with decisiveness.”
The chart below shows the home price obstacle facing Chinese leaders weighing any additional stimulus at this stage in the game.
BofA Merrill Lynch Global Research
The second version of reality is that advanced by the rising U.S. stock market.
Not only have U.S. stocks outperformed outperformed other major equity markets around the world this year, but within the U.S. market, consumer staples and consumer discretionary stocks have been leading the way higher. Woo points out that the first quarter of this year was the first time since 2000 that both consumer sectors led a rising stock market.
However, the story on the ground is not as encouraging….”
