Trump’s infrastructure plans facing an uphill battle
Five big themes likely to dominate the thinking of investors and traders in the coming week
1. Built up
A chart of US infrastructure stocks since President Donald Trump’s election looks a bit like a humpback bridge or perhaps a downhill switchback road. Some share prices soared from the day after the vote on expectations Trump would make good on his proposal to spend $1 trillion on infrastructure. That looks less likely now, after the president scrapped plans to create an infrastructure advisory council. His move came hard on the heels of the collapse of two other high-profile business advisory councils after several chief executives quit over Trump’s remarks blaming anti-racism activists as well as white nationalists over violence in Charlottesville, Virginia. All this has raised concerns among investors over how much of Trump’s economic agenda – including tax reform – will ever be implemented.
2. Mountain views
Top central bankers meet for their annual get-together in Jackson Hole, Wyoming, with potentially a lot to talk about. Several of the developed world’s central banks appear to be on the cusp of beginning to wind back the massive monetary stimulus injected into their economies since the global financial crisis. In recent years, policymakers have used their mountain retreat to flag important moves. This one, which runs from Aug. 24-26, may be less newsy. European Central Bank President Mario Draghi will not deliver a new policy message, sources told Reuters. ECB minutes showed a strengthening euro and its impact on inflation mean Draghi is unlikely to move towards tapering soon. Likewise, minutes from the US Federal Reserve’s latest meeting showed policymakers were worried about weak inflation and that some called for a halt to rate hikes until it was clear the trend would pass.
3. Vroom to boom or a bust?
The topic of this year’s Jackson Hole conference is “Fostering a Dynamic Global Economy,” and the central bankers meet amid some deteriorating market signals. One indicator that could be showing cracks is the Bank of America Merrill Lynch High Yield Master II Index .MERH0A0. On an option-adjusted spread basis, the index recently widened from one of its narrowest points on record. Investors have been driving spreads narrower in a grab for extra yield over the risk free rate. One curious example of the froth in the market is electric car maker Tesla’s recent $1.8 billion junk bond (rated B3.B-minus) offering on Aug. 11. The company bumped up the yield to 5.3% from its initial 5.25%, but sold it at par. The company spokesman told Thomson Reuters IFR: “There was certainly no need to increase the coupon.” Indeed, the spokesman said it was Tesla rewarding faith in those who demonstrated faith in the company. Meanwhile, Tesla’s eight-year bond is trading below par with a yield now up to 5.674%.
4. Meet and beat
European earnings revisions are getting a second wind as analysts grow more positive on the region’s equities after strong second-quarter results from its banking sector in particular. Earnings for the pan-European STOXX 600 had been revised sharply down from the start of results season as investors and brokers grew concerned about the stronger euro denting profits, and analysts curbed their enthusiasm after an impressive first quarter. But the dip in earnings revisions is over, Morgan Stanley strategists said on Friday, with financials leading the way in upgrades after analysts hailed their second-quarter results as surprisingly robust. Banks’ solid results reflect a European economy whose growth is being fuelled by a rebound in domestic demand rather than trade, Morgan Stanley added, saying this was likely to make the region relatively resilient to the appreciation in the euro.
5. Rising sun
The world’s third-largest economy is on its best growth run in more than a decade and, somewhat surprisingly for a country struggling to escape deflation, private consumption has been gaining strength. Japan’s economy grew at an annualised rate of 4% in the June quarter, and with growth in per capita GDP surpassing that of the United States, consumers are splashing out on cars and home appliances and dining out more often. But even after six straight quarters of growth, there’s still a sense that this revival is very fragile. There is hope, but great uncertainty, that inflation will re-emerge after decades of absence.