Article / 24 February 2017 at 5:58 GMT

3 Numbers: Why populists will be good even if you think they are bad

Blogger / MoreLiver's Daily
Finland

  • The Trump trade and Europopulism are two underlying themes for investors
  • Positive implications from the rise of the populism still largely misunderstood
  • US consumer sentiment to remain elevated, but not much room for improvement
  • The recent fall in US new home sales should begin to reverse

By Juhani Huopainen

Greece remains headline material, and credit rating agencies Moody’s (Caa3, stable outlook) and Fitch (CCC, stable outlook) are scheduled to possibly review the rating this weekend.

Why populists are good for you

There will be some less important European data published today, but as Europe remains nervous, they might be of some interest to investors. France’s February consumer confidence will be published at 0745 GMT, while Italy’s business and consumer confidence will be released at 1000 GMT.

The full European sentiment report will be published next week. Also Italy’s December industrial orders and sales will be published at 0900 GMT.

See here for business confidence and here for consumer confidence reports. While euro area’s latest growth figures have been revised lower, the sentiment indices are running hot.


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 Good for macro? European populism is surging at the moment. Photo: Shutterstock

The sentiment is very strong, and no doubt the US reflation story is helping here. The key question to ask is – if things are so bad (Europe threatened, populists etc), why are stock prices – as well as business and consumer sentiment - so high across the Europe?

There are two big themes currently battling for investors’ attention. The first one is the “Trump-trade”, or US-led global reflation. It is based on promises of tax cuts, deregulation and infrastructure spending – but also protectionist elements.

US president Donald Trump is speaking to the Congress next Tuesday and he is expected to talk about the administration’s goals and timetable. A large part of the “Trump trade” is purely an improving economy and improving earnings while monetary policy is still reasonably dovish. It would have happened without Trump, but perhaps not to the same extent.

The rise of Europopulists

The second big theme is the “Europopulists”, or the rise of the European populists as a political force.  The word populist is used quite liberally, but is most often used to describe political movements that oppose some or all parts of transnationalism and tend to have conservative values.

The implications of the Europopulist theme are complicated. In theory, adding uncertainty by Brexit, weaker or even dismantled European Union and increasing protectionism should be bad for risk assets.

But on the other hand, Europopulists force the establishment to continue easy monetary policy, ease on austerity and try to mitigate the consequences of the refugee crisis and Russia’s covert and overt interference.

Some, or all of that might not have happened without the threat of a loss of power.

While some risk assets have been hurt, notably by increased government bond spreads, the economic sentiment and stockmarkets have performed amicably.

The “Europopulist” trade is not as straightforward as many seem to hope. I would have guessed the previous populist wins would have taught investors a valuable lesson, but that does not seem to be the case.

This is what makes markets fun. Everyone can have their own view, but not everyone will be right in the end. It is important to remain sane enough not to be a captive of one’s beliefs, but listen to the market action.

You don’t have to agree with the Dutch politician Geert Wilders or with Brexit, but you can be thankful that they have united others and pushed them to action. Whatever explanation suits you is fine, as long as it fits what is happening in the markets.

US February Consumer Sentiment (1500 GMT): The consumer sentiment index is expected to have declined a bit to 96 from January’s lofty 98.5.

The mid-month reading for February was 95.7, so on average investors are expecting a slight upward adjustment.

As the stock market has continued making new highs and the mid-month worries about Trump’s erratic statements and administration’s problems have decreased a bit, the adjustment sounds reasonable assumption

On the other hand, the large increase of the sentiment index in December still limits any immediate upward gains. The index has rarely reached 100-level in the past, and it has for any length of time exceeded it in the past only once, just before the dotcom-bust.

It is highly likely that the unemployment rate is close to cyclical lows, though wider measures of unemployment could still show improvement and wages could rise. These could keep the consumer sentiment elevated for some time.

US January New Home Sales (1500 GMT): The annual rate of monthly home sales is expected to have been 567,000 in January.

This is higher than the 536,000 in December, but far below the last July’s post-crisis high of 622,000.

Longer term, the decline since last July is best characterized as normal variation around the post-crisis rising trend, and should not be a reason to worry.

Note how home sales and mortgage rates seem to be inversely correlated. When the rates go up, home sales go down. Home sales started declining at the same point when the global bond yields bottomed. This is somewhat similar to what we saw in 2013. Much depends on whether bond yields stabilize at the current levels, and whether the rising incomes are able to compensate for the higher financing costs.


-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.






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