Divergent: Monetary Policy in a Post-Apocalyptic World
Too dramatic? BK continues to think the biggest risk for markets (US stocks for the asset-class challenged) is the unwinding of the divergence theme. That is to say, the consensus trade is that the FED will raise rates this year –>therefore, buy US assets -> dollar, bonds, stocks. The weaker than expected US average hourly earnings challenges this view and thus poses the risk that the consensus trade could unwind.
This means that the next two weeks are incredibly important for global markets:
First – if US markets can take a cue from Taylor Swift and ‘shake off’ avg hourly earnings then it will continue to be safe to own stocks.
Second – this week the European Court of Justice makes a preliminary ruling on QE –> if they rule against QE then expect an apocalypse… too dramatic? Ok, fine –> expect a record amount of dollar longs to be
Third – It’s time for Draghi to put up or shut up. He has done a masterful job of talking rates lower, but a lack of action risks losing credibility.
Tread lightly over the next fortnight. BK will spend the next few days taking profits where he has them and double checking hedges.