Should investors – and Trump – fear next Fed chief?

Stocktake: Proinsias O’Mahony

There's been surprisingly little chatter about a crucial issue facing financial markets: who will be the next chair of the Federal Reserve? Donald Trump has said a decision will be made this month. Current incumbent Janet Yellen is not expected to be reappointed, with Kevin Warsh the bookies' favourite to take over. It would be a curious choice.

Warsh is an investment banker, not an economist, and his CV cannot compare to Yellen or former Fed chairs like Ben Bernanke and Paul Volcker. He got it badly wrong on the big issues over the last decade. He championed financial innovation prior to the global financial crisis.

A Fed board member between 2006 and 2011, he consistently warned about a non-existent inflation threat, even repeating these concerns the day after Lehman Brothers went bust. He remained hawkish between 2009 and 2011, even as inflation stayed on the floor and unemployment hovered near 10 per cent, opposing Ben Bernanke's quantitative easing programme.

Credentials aside, Trump’s apparent enthusiasm towards Warsh is surprising.


At a recent conference, Societe Generale strategist Albert Edwards said Warsh argued the Fed “had become the slave of the S&P”. Warsh has long argued – with some justification – that the Fed has been too concerned about asset prices in recent decades.

In contrast, Trump is profoundly concerned about asset prices, repeatedly tweeting about the bullish movements of the Dow Jones, which he seemingly views as some sort of daily affirmation of his brilliance.

Warsh, one suspects, would not lose sleep over a market downturn. A Trump-Warsh alliance doesn’t appear to be a match made in heaven.

Catalonian crisis won’t cripple Spanish stocks

The Catalonia crisis briefly spooked some investors, with Spain’s Ibex 35 falling almost 3 per cent last Wednesday – its biggest one-day fall since June 2016’s Brexit referendum.

European indices remained calm, however, while the Ibex reclaimed most of its losses on Thursday. Little wonder: most Ibex 35 stocks companies have little exposure to Catalonia.

In fact, Spanish stocks are not even that exposed to their country of origin, as Financial Times columnist Miles Johnson pointed out. Roughly two-thirds of their revenues are generated outside Spain; almost half of their revenue comes from outside the European Union. The Ibex's biggest component, Banco Santander, made more than twice as much money in Latin America than in Spain last year; Mexico accounted for almost half of BBVA's banking profits last year, with Spain accounting for just 7.4 per cent.

Other international indices are similar. The FTSE 100, for example, is much more influenced by global commodity prices than by the UK economy. Irrespective of the Catalonian-related headlines, globalisation means knee-jerk selling makes little sense in such instances.

Who cares about the FAANGs?

Throughout 2017, the talking heads have warned the S&P 500 was too reliant on high-flying technology stocks, especially the so-called FAANG stocks – Facebook, Apple, Amazon, Netflix and Google. If they fell, the argument went, they would take indices down with them. Well, the big tech names have lagged lately, but stocks are still hitting all-time high after all-time high.

The sceptics were wrong on two fronts. Firstly, they presumed sellers of tech stocks would go to cash; instead, they simply rotated into other sectors, which have since taken the market baton.

Secondly, for all the agonising about the FAANGs, the rally was never a narrow one. Stocktake has consistently pointed out how market breadth has been strong in 2017 and that remains the case.

In the first two days of last week, 18 percent of S&P 500 stocks hit 52-week highs (at major market tops, only around 6 per cent of stocks typically hit new highs). Three-quarters of stocks are trading above their 50-day average. Nine of the 11 S&P 500 sectors have gained this year, with six recording double-digit percentage gains.

Bull markets tend to thin out before they top, but this is a broad-based rally. For traders, a bullish posture remains the obvious option.

From biotech to bitcoin

The share price of an obscure biotech company almost doubled last week. Did it make a major commercial breakthrough? Nope – it changed its name.

The company, formerly known as Bioptix, announced it was getting out of biotech and into cryptocurrencies, hence it was changing its name to Riot Blockchain. Shares soared prior to the announcement, indicating someone knew changes were afoot, and spiked even higher after the unveiling of the changes.

This is not a new strategy. During the 2015 Chinese stock bubble, 79 stocks changed their name in the first four months of the year, a move that typically generated lots of market excitement.

Back in the late 1990s, US stocks that added ‘.com’ to their names soared an average of 74 per cent within 10 days. These days, everyone is gaga for all things cryptocurrencies. Expect further name changes in the coming months.