While
many analysts say superior earnings growth stateside may continue to see U.S. stocks outperform and that the cross-asset action is just a pause, a growing cohort say the ‘America First’ trade can’t continue.
“
The recent divergence in the performance of U.S. equities versus the rest of the world is unprecedented in history,” writes Marko Kolanovic, global head of quantitative and derivatives strategy at JPMorgan Chase & Co.,
highlighting a record divergence in U.S. price momentum relative to Europe and emerging markets. “Given that
this is such a rare occurrence (has never happened for both Europe and Asia), it suggests to us this is a market condition that will not persist.”
https://www.bloomberg.com/news/articles/2018-08-22/trump-topples-u-s-exceptionalism-in-markets-as-world-catches-upIn other words, something will give – either the US will fall
or EM and Europe equities will catch up and move higher (the historical sample of these events is too small to statistically infer which way this convergence will most likely happen). We believe this market setup has been driven, in part by fundamentals, but also significantly by technical drivers.
In fundamentals, he lays out all the usual talking points we have noted in recent weeks that explain why the S&P just hit a new intraday high, oblivious of events in emerging markets: these include "Trump’s tariffs and sanctions causing broad equity risk aversion and a rally in the USD against a backdrop of strong support for US equities from buybacks, tax-related earnings boosts, as well as inflows from systematic strategies since April."
While buybacks, facilitated by Trump's tax repatriation, as well as strong earnings thanks to Trump's $1.5 trillion fiscal stimulus are certainly a key aspect driven US equity outperformance, the other key reason for strong US performance is the Fed pushing the USD higher as other central banks around the world are on hold. Then there is the ongoing trade war:
The trade war is also negatively impacting China equities and CNY, and there are a number of largely idiosyncratic developments from Turkey, Italy, Argentina, Russia, etc. that weigh on equities and currencies outside of the US.
As Kolanovic summarizes, "
buybacks are creating a shortage of US stocks, the Fed is creating a shortage of US dollars, and Trump’s trade wars and sanctions are further boosting the USD."
https://www.zerohedge.com/news/2018-08-21/has-never-happened-jpms-kolanovic-spots-unprecedented-divergence
