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Chart of the Week – Nov. 6, 2017

We still believe that, longer term, the probability the Euro/USD exchange rate heads towards 1.30-1.35 is a reasonable expectation based on signs that the region’s economy is mending.  However, recent developments have sent the Euro lower versus the dollar.  Much of the weakness may be attributed to the Spanish federal government’s decision to dissolve Catalan regional autonomy, which has created a considerable amount of social unrest.  The Euro is currently trading around 1.16 which is critical because it is below its intermediate term trend and sentiment could force it even lower.

 

WCM perspectives on international, high yield and market stability in the news

At CityWire USA’s recent West Coast conference, several “gatekeeper” attendees were asked followup questions after a conference survey about views on international equities, high yield bonds, and our perennial favorite — what could take this market out. WCM’s views are captured in this excellent synopsis along with the perspectives of several esteemed colleagues across the industry. As we are always quick to point out, it is important to our process not just to be in touch with what we think but also what everyone else has on their minds.

If you have access to the site, the article can be viewed here. Otherwise, follow this link to read a downloaded PDF version of the article.

Gatekeepers gravitate to international equities, exit high yield | Citywire

The Persistence of Memory

I have two Salvador Dali prints hanging near the front door, perhaps to remind me that the surreal is present everywhere. This afternoon hearing and reading reports from Catalonia my thoughts kept wandering back to the image of the burning giraffes in this Catalan’s work. In the space of hours, we went from President Puigdemont and the Catalan Parliament declaring an independent and sovereign state to PM Rajoy invalidating the declaration and moving to dissolve the regional government. The EU and many of its individual members declared an ongoing commitment to Spain as a unified member state. Desires to restore and expand provincial autonomy that Catalans had tasted and lost multiple times over the last century come into direct conflict with Madrid’s desire for control and stability and Europe’s greater vision of unity and harmony. Nationalistic and nativistic impulses have been on the rise across Europe, but where the boundaries are drawn depends on who holds the pen.

The Euro showed further weakness this week, perhaps in anticipation. What this will mean for US investors is uncertain. Catalonia accounts for a significant percentage of Spain’s GDP, but Spain as a whole is only 6% of the investable MSCI Europe Index. Any trajectory other than peaceful discussion and accommodation will hurt Spain’s economy, but that in itself does not seem to pose a major investment risk for diversified international investors. However, the potential for contagion to other provinces of Spain and beyond their borders to other parts of Europe that historically enjoyed separate identities could be profoundly disruptive to border permeability, travel, trade, currency and other factors that have made Europe increasingly attractive as an investment prospect in the last year.

This will be an interesting weekend. Keep your eye on the giraffes.

Chart of the Week

We are pleased to let our followers know that we are launching a “chart of the week” to start conversations, provoke thoughts, open new lines of inquiry, or just cause trouble. The COTW will highlight something that is key to our own deliberations as we think about both our near-term tactical positioning and long-term views for our clients’ portfolios. Look for the chart and brief commentary every Monday.

You can also follow us for the chart and other news and insights —

on Facebook: https://www.facebook.com/wildecapitalmgmt
on LinkedIn: https://www.linkedin.com/company/18290003/
and on Instagram: @wildecapitalmanagement2016

We hope you find these weekly insights useful. We look forward to hearing your thoughts and questions at contact@wildecapitalmgmt.com or on our social media accounts.

And now for our first COTW:

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To dream the impossible dream

It is easy to forget that we are just a scant few decades into Spain recovering from the Franco regime and joining the community of developed democratic Western nations. The echoes of the systematic repression of the Basque, Galician and Catalan regions and identities still ring. Protest, conflict and terrorism have punctuated the post-Franco period as they try to reassert identity, language and culture, and expand the autonomy suppressed after the end of the Second Spanish Republic. These are just a few of many such situations that challenge a liberalized, free and unified Europe.

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So what’d I miss?

In the beginning of Act II of Hamilton, Thomas Jefferson returns in the Fall of 1789 from his five years abroad in France as our Minister in Paris and finds himself decidedly out of touch with Post-War America as he prepares to join Washington’s first cabinet as Secretary of State and square off with Secretary of the Treasury Hamilton.

We took a Summer hiatus from writing for the WCM blog but kept our noses close to our screens and made multiple adjustments to the portfolios in August. This blog post was written as a bit of a thought experiment. If we had stepped away entirely at the beginning of July and came back for the Fall like Mr. Jefferson and also asked “What’d I miss?”, what would our reaction be?

The Jefferson character sings “There is no more status quo”. He is referring to France following us to revolution, but looking around in September 2017 in these United States, the same could easily be said here and now. What’d I miss? North Korea is rattling its nuclear sabre, hurricanes batter the Caribbean and South, Nazis and the Klan are marching in Charlottesville, healthcare reform legislation imploded, the previously unassailable bro culture in Silicon Valley is finally being taken to task, the Dollar fell and the Euro was ascendant, and long term rates are closer to 2% than 3%. With Stanley Fischer’s announcement, the Federal Reserve Board is going to have more empty than filled seats. Let’s throw a total solar eclipse in for good measure.

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Tech technicals

Headlines were blaring that Technology stocks had been beaten down to close the second quarter. Note was made that it was the worst sell-off of these companies in six weeks. Charts are suggesting we may be seeing a change of market leadership and the Tech sector could be in for rough times. In the stock market six seconds is an eternity and six weeks is hardly any time at all. It depends on your objectives and your perspective. Are you a trader or investor?

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Tempestuous testimony

This has already been, and will continue to be, a week of significant events which, while not currently roiling markets, have the potential to change the mood and with it the degree of optimism fueling investing in those markets. Just today we had the sometimes tempestuous testimony of AG Jeff Sessions coming close on the heels of the same from (former) FBI Director James Comey, and in the shadow of chatter about terminating the special investigator and a pitched rhetorical battle over “travel bans” between the President and the courts. There is talk that the Senate Republicans are working behind closed doors on a health care reform plan, which is the closest to a sign there is that anything in the legislative realm is going to even be addressed before the Summer recess. A “week of infrastructure” was overshadowed by the drama, and did not yield anything of substance in any event. Treasury Sec. Mnuchin has indicated we will not hit our heads on the debt ceiling until early September, but “…markets don’t want us to wait.” The prospects for any market-moving, or perhaps even supporting, progress in 2017 are receding quickly.

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London Bridge is falling down

Silver and gold will be stolen away,
Stolen away, stolen away,
Silver and gold will be stolen away,
My fair lady.

Three attacks in three months, twice on the Bridge. Unfortunately this is a refrain all too familiar to the British not just recently but historically. They have demonstrated their resilience socially and economically since the late 1930’s in the face of small- and large-scale terrorist attacks, and there is little to suggest otherwise this weekend. Much has been said and written already and more is yet to come on the sociopolitical implications of this drumbeat of violence, but our role is to examine the capital markets implications.

We expect UK markets to continue with little change based on this tragic incident. Tangentially related, the unfolding fracas in the Gulf will probably be more material to energy and broader markets as Saudi, Bahrain, and UAE spar with Qatar over terrorism and the Muslim Brotherhood. But, looking down the road just a scant few days, we are keeping a close watch on the snap UK election.

As we wrote previously, T. May calling the election may have propped open the door a notch to some moderation around Brexit if her contingent showed poorly on the 8th. However, the shock of yet another terrorist incident could further harden positions on matters of border security, immigration, and public support programs and propel the Conservatives and UKIP toward a more certain path of disengagement. If the isolationist forces in the UK win out and the moderate Eurocentrics hold the line in the French parliamentary elections later in June, our attention will likely be drawn increasingly to a Europe ex-UK as the reasoned place to deploy capital and own risk outside the United States.

Is the Trump market premium at risk?

It is hard to say whether the markets are considering re-rating the certainty premium we reaped in the six months since the US elections or just slipping into the Summer doldrums.

Immediately prior to the election one of the scenarios we put forward was for markets that would be calmed by the status quo of a Clinton Presidency, but with the risk of being roiled by constant investigations and hearings. Regardless of where we sit politically as observers of market behavior, we can generally agree that a Washington DC consumed by palace intrigue would not contribute positively to market performance, particularly a market waiting for trade, tax, banking, securities and other reforms. Nearly twenty years ago another Clinton was in DC’s crosshairs, and markets fell in anticipation of the unimaginable in the Starr report only to fully recover once the unknown was known and the impeachment proceedings were under way.

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