Thursday, 28 July 2016

Markets mixed, economy at risk from collapse in asset prices

Markets were mixed on Wednesday.

The S&P 500 fell 0.1 percent after the Federal Reserve held short-term interest rates steady but the STOXX Europe 600 rose 0.4 percent.

In Asia, the Nikkei 225 jumped 1.7 percent after Prime Minister Shinzo Abe announced a ¥28 trillion stimulus package but the Shanghai Composite Index tumbled 1.9 percent following a report that China's banking regulator was considering clamping down on the nation's multi-trillion-dollar wealth management products market.

In the US, investors are apparently already wary of the risk in stocks, rotating out of them and into bonds in the week to 20 July, according to data from the Investment Company Institute.

Todd Rosenbluth, director of ETF & mutual-fund research at S&P Global Market Intelligence, said that “investors appear to be getting nervous as the bull market ages”.

Indeed, Greg Ip at the Wall Street Journal is concerned that the economy is again under the sway of asset prices.

The past two recessions were ushered in by a collapse in asset prices. The risk of a repeat is growing...

[N]et wealth in the U.S. now tops 500% of national income. Ominously, net wealth has reached that level only twice before: from 1999 to 2000 during the Nasdaq bubble, and 2004 to 2008 during the housing boom...

[W]hen valuations are so high, even justifiably so, it takes only a small shift in the appetite for risk, expectations of profits, or interest rates to trigger a major downdraft. The U.S. Treasury’s Office of Financial Research noted this week that stocks have reached today’s valuations “only ahead of the three largest equity market declines in the last century.”

Wednesday, 27 July 2016

US earnings recession set to continue

Markets were mixed on Tuesday.

In the US, the Dow Jones Industrial Average slipped 0.1 percent while the S&P 500 was flat.

Elsewhere, the STOXX Europe 600 rose 0.1 percent but the Nikkei 225 fell 1.4 percent.

The US stock market was weighed down on Tuesday by disappointing corporate earnings. McDonalds in particular fell 4.5 percent after reporting weaker-than-expected same-store sales in the latest quarter.

According to FactSet, earnings for companies in the S&P 500 are on track to contract 4.5 percent in the second quarter from the prior year, marking the fifth consecutive quarter of earnings declines. That is actually better than the 5.3 percent fall expected by analysts as of 30 June 30.

However, S&P 500 earnings are now expected to decline in the third quarter as well, thus extending the earnings recession to six quarters.

Tuesday, 26 July 2016

Markets mixed, Japan and China struggle to stimulate economies

Markets were mixed on Monday.

The S&P 500 fell 0.3 percent while the STOXX Europe 600 rose 0.2 percent.

Asian markets were little changed, with the Nikkei 225 marginally lower and the Shanghai Composite Index up 0.1 percent.

The Bank of Japan is widely expected to add montary stimulus when it meets this week, even though massive monetary and fiscal stimulus have so far failed to spur faster growth as the government struggles with a debt burden that is the world's heaviest and a population that is the world's oldest.

China has also been trying to keep monetary policy loose but may be facing liquidity trap.

Michelle Lam, an analyst at Lombard Street Research, wrote in a note on Monday that "our measure of broad money...has deteriorated on a year-on-year basis, and fell below its level in 2013-14 and the government’s target".

Monday, 25 July 2016

China's "unprecedented" credit growth a risk for global credit

China's economy grew 6.7 percent in the first half of the year, unchanged from the first quarter. Unfortunately, this has come at the expense of even more debt in the economy. From Reuters:

As China's economy notches up another quarter of steady growth, the pace of credit creation grows ever more frantic for every extra unit of production, as inefficient state firms swallow an increasing share of lending...

"The amount of debt that China has taken in the last 5-7 years is unprecedented," said Morgan Stanley's head of emerging markets, Ruchir Sharma, at a book launch in Singapore. "No developing country in history has taken on as much debt as China has taken on on a marginal basis."

Another report from Reuters says that China's debt is a risk for global credit.

Chinese companies will consume nearly two-thirds of new credit raised globally by 2020 as the world's second-largest economy leans on the corporate sector to support growth, said a report from S&P Global published on Thursday.

The report highlighted China's opaque and ever-expanding corporate sector and rapidly rising U.S. leveraged finance as key tail risks for global credit, with outstanding debt forecast to expand by half to $75 trillion by 2020.

However, it is not just China. Christopher Langner at Bloomberg says that debt is an Asia-wide problem.

Millions of words have been expended on China's debt problem. Two points need making: The danger is Asia-wide. And if an implosion is coming, it's most likely in the next three years.

Saturday, 23 July 2016

Global markets mixed but US looks "solid"

Markets were mixed on Friday.

The S&P 500 rose 0.5 percent to hit another record high but the STOXX Europe 600 fell 0.1 percent and the Nikkei 225 tumbled 1.1 percent.

“This recent rally has been so dependent on expected support from central banks, so there’s definitely an element of nervousness to it,” said James Athey, investment manager at Aberdeen Asset Management.

However, David Stubbs, global market strategist at JP Morgan Asset Management, said that while confidence in the UK has taken a hit after its Brexit referendum, “the situation in the U.S. remains one of solid, steady data”.

In addition, Oppenheimer's head of technical analysis Ari Wald told CNBC that many stocks are participating in the market rally, indicating a “resumption of strength like it did in 1995, 2003, 2009 and 2012”.

“All-time highs are bullish,” Wald said. He sees the S&P going to 2,250 by the end of 2016.

Friday, 22 July 2016

Stocks fall amid signs of exuberance

Markets were mostly down on Thursday.

The S&P 500 fell 0.4 percent, as did the Dow Jones Industrial Average, ending its nine-day rally.

Elsewhere, the STOXX Europe 600 fell less than 0.1 percent while the Nikkei 225 rose 0.8 percent.

Investors are unperturbed by the decline on Thursday.

"We've got a long way to run but this is a breather that we need, quite frankly," said Ben Willlis of Princeton Securities Group.

Maybe investors are becoming overconfident. Bloomberg sees signs of exuberance in stocks.

The S&P 500 and Dow Jones Industrial Average both closed at record highs on Wednesday and a peek at the underbelly of market flows and sentiment suggests that a sense of euphoria has enveloped investors.