By William Watts, MarketWatch
Some investors began 2018 questioning whether a “Powell put” would ensure the Federal Reserve would come to the market’s rescue in the event of a selloff. A year later, some Asian investors are putting their faith in a trio of such metaphorical instruments.
In real life, a put is an option that gives the holder the right but not the obligation to sell the underlying instrument at a set price by a certain time — a potentially valuable hedge if a bullish position goes south. Since at least Alan Greenspan’s tenure as head of the Federal Reserve beginning in the late 1980s, investors have talked of a “Fed put,” a reference to the idea that the central bank would take steps to soothe markets in the event of a violent downturn.
Deutsche Bank macro strategist Alan Ruskin, fresh off a round of client meetings in Hong Kong and Singapore, said in a Friday note that he noted a “strong consensus about a newfound Powell put” — reference to Fed Chairman Jerome Powell — due to the Fed’s sensitivity to financial conditions and expectations it will hold off on further rate increases at least through the first half.
Fed policy makers begin a two-day meeting Tuesday that’s expected to drive that message home.
Worries the Fed was moving too quickly to raise rates were cited as one of the catalysts behind a late 2018 selloff that accelerated in December, leaving the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.57% down more than 6% on the year. Stocks have rebounded sharply to begin 2019, with the bounce tied in part to expectations the Fed will move slower if not end the hiking cycle.
But that’s not all.
“Then there is a widely perceived President ‘Trump put’ with the U.S. Administration particularly sensitive to equity prices, especially as market gyrations impact the U.S.’s negotiating power with China on trade,” Ruskin wrote.
Indeed, some investors have criticized the administration for what they see as clumsy efforts to shore up markets on down days.
“Lastly, there is commonly perceived President Xi put’ with some clients suggesting 6% China growth in 2019 is the line in the sand,” Ruskin wrote.
China’s economy grew 6.6% in 2018, its slowest pace since 1990, and is expected to face continued headwinds as the U.S. and China attempt to come to an agreement in a long-running trade fight. China’s central bank has moved to ramp up stimulus and bullish investors have argued that policy measures should provide a cushion and help support global equities and other assets perceived as risky in the year ahead.
“None of this means the slowdown in global growth will stop or the U.S.-China trade talks will inevitably resolve longer-term tensions, but the political and economic incentives for a deal are seen as aligned, which should constrain risk-negative price action,” Ruskin said.
“Portfolio managers are mostly comfortable ignoring the evidence that U.S.-China trade talks are not as yet very advanced as Wilbur Ross and others have warned,” he said, referring to the U.S. commerce secretary’s remarks Thursday saying the two sides remained “miles and miles” apart.
That said, “for all the positive talk, few participants think this means U.S. equities are going to make new highs,” Ruskin said.
Instead, clients saw currency trades, via bets on high-yielding emerging markets, as the best way to express their optimistic views, but only on a tactical basis.
He noted concerns that the environment doesn’t support a “natural carry trade” — carry trades consist of selling a low-yielding currency and investing the proceeds in higher-yielding assets — because growth is still decelerating, even if central banks are in a more benign phase.
Ruskin argued that if — and put the emphasis on “if” — the central bank bias toward tightening in 2018 did give way to accommodation, it would likely reignite a “scramble for yield” on expectations developed markets would again see nominal official interest rates at or close to zero.
Ruskin noted there was also “plenty of talk that local Asia equity markets are cheap (especially China) but actual risk-positive expression appears to be far more prominently expressed in bullish local debt markets.”
This article was originally published on Jan. 26.