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“If You Were Rolling Your Eyes At The Equity Melt-Up, What A Vengeance”

Courtesy of ZeroHedge. View original post here.

Authored by Bloomberg reporter Justina Lee

If you were rolling your eyes disapprovingly over the equity melt-up earlier this year, what a vengeance.

It turned out we were wrong about the imminence of a U.S.-China trade deal – so wrong, in fact, that the spat has morphed into a tit-for-tat of further tariff hikes and company restrictions. Right after markets took a breather on Thursday, U.S. President Donald Trump shocked everyone with threats of higher levies on Mexican goods over immigration, and China announced it will set up a list of “unreliable entities” in retaliation of America’s Huawei ban.

Here’s how bad it got: The Stoxx Europe 600 had its worst month since January 2016. Its cyclical shares dropped for a sixth straight week, the longest streak for an index going back to 2010. Autos have hit the lowest versus the broader benchmark since 2013, while banks have reached an all-time relative low.

Time to buy the dips? It’s not uncommon still to hear the argument that mutual interest will bring Beijing and Washington to an accord. Gregory Perdon, co-chief investment officer at U.K. private bank Arbuthnot Latham, points out that the Chinese President is under pressure from an economic slowdown while his U.S. counterpart is sensitive to stock losses and his re-election prospects. He’s counting on the Group of 20 summit in June for a detente.

And with bond yields plunging – the German 10-year rate reached a record low on Friday — equities’ relative appeal is growing.

For now, earnings estimates have stayed steady, but it’s hard to price the risk premium amid an uncertain economic outlook, especially for Europe, which is trade-sensitive and already seeing slowing growth. Stocks could get another boost from further monetary easing, but in this part of the world, central banks hardly have room to cut rates.

“The market is finding it difficult to price in any overnight Trump tweet about tariffs or a reaction from China to possibly restrict rare earth minerals to the U.S.,” says Punit Patel, a fund manager at London & Capital Asset Management. “For the moment it’s less about deteriorating fundamentals with regards to near-term earnings estimates and it’s just the market trying to gauge what sort of multiple does it want to compensate for the tail risks building on the 2020 EPS backdrop.”


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