Tuesday, 3 March 2015

Markets mixed but US stocks hit record high

Markets were mixed on the first trading day of March.

In the US, the S&P 500 rose 0.6 percent to another record high. The Nasdaq Composite added 0.9 percent to cross 5,000 for the first time since 2000. Yields on 10-year Treasuries rose nine basis points to 2.09 percent.

However, the STOXX Europe 600 fell 0.2 percent. Portugal’s 10-year yield declined for a 14th successive day, the longest run on record, to an all-time low of 1.74 percent. Italy’s 10-year yield dropped to a record 1.294 percent.

Oil also fell, with Brent falling 4.9 percent and West Texas Intermediate slipping 0.3 percent.

Monday, 2 March 2015

Risk appetite returns but is it enough to sustain the bull market?

Risk appetite among investors rose in February.

Stocks rallied last month, bringing the bull market closer to its sixth anniversary. The MSCI All-Country World Index jumped 5.5 percent, its best monthly performance in three years, and set a new intraday record on Thursday in the process.

The Standard & Poor’s 500 Index rose 5.6 percent for its best month since October 2011. The Stoxx Europe 600 Index surged 6.9 percent. The MSCI Asia-Pacific Index rose 4.2 percent.

In the bond market, United States Treasuries, a safe haven among global investors, fell in February, pushing the 10-year yield up 37 basis points to just over 2 percent.

However, junk bonds rose in February, with the SPDR Barclays High-Yield Bond ETF gaining 2.1 percent, its biggest increase since June 2012.

In Europe, government bonds rose ahead of the European Central Bank’s planned purchases as part of its quantitative easing programme. Switzerland’s 10-year rate went below zero, as did the two-year yields for ten countries including Germany, France, Slovakia and the Nordic countries.

The move by the ECB almost certainly whetted investors’ risk appetite. And more central bank monetary stimulus is already on the way.

On Saturday, the People’s Bank of China announced on Saturday that the one-year deposit rate and the one-year lending rate will be lowered by 25 basis points to 2.5 percent and 5.35 percent respectively on 1 March.

Despite the recent improvement in risk appetite and continuing monetary stimulus, fund manager John Hussman remains unimpressed.

In his latest commentary, Hussman wrote that “our measures of market internals and credit spreads, despite moderate improvement in recent weeks, continue to suggest a shift toward risk-aversion among investors.”

“On a wide range of historically reliable measures,” he wrote, “we estimate current valuations to be fully 118% above levels associated with historically normal subsequent returns in stocks.” He added: “We do not have indications from market action and credit spreads that these extremes are likely to be tolerated for long.”

Hussman is also not assured by the prospect of further monetary easing. He wrote in his commentary that historically, easing by the Federal Reserve in an environment of risk-aversion did not stop the stock market from declining.

He noted that the Fed began cutting interest rates on 11 February 1930, nearly two and a half years before the market bottomed. The Fed began cutting rates on 3 January 2001 but the bear market continued for almost another two years. And in 2007, the Fed cut the federal funds rate on 18 September, even before the market peaked, and kept cutting as the market turned down and kept falling.

Saturday, 28 February 2015

Equity dividend yields exceed government bond yields

Government bond yields have fallen so much over the last few years that we are now seeing an unusual phenomenon.

From the Buttonwood column in The Economist:

Buy bonds for income and equities for growth. That is what many a financial adviser will tell you. But it isn't really true any more. According to Citigroup, the dividend yield on the equity market is higher than the 10-year government bond yield in Australia, Canada, France, Germany, Japan and the UK. In the US, the two yields are neck-and-neck but equity investors can get an extra cashflow boost from buy-backs.

The current pattern contrasts with that of the last 50 years, when equities usually yielded less than government bonds because of the potential for the dividends to grow.

It is, however, similar to the pattern in the first half of the 20th century, when equities also tended to yield more than bonds.

So the big question for investors is; are we going back to the 1970s and 1980s? Or will markets look more like the first half of the 20th centuty? If the former, sell the bonds as fast as you can. If the latter, then this seemingly strange relationship will last. Equities may turn out be the best income provider.

Friday, 27 February 2015

Global stocks touch record high but bonds may be set for crisis

Global stocks fell on Thursday, but not before touching a record high.

The MSCI All-Country World Index rose to 434.4, an all-time high, but fell thereafter to close 0.1 percent lower at 432.88.

The S&P 500 closed 0.2 percent lower.

The STOXX Europe 600 was the outperformer on Thursday, jumping 1.0 percent to its highest level since July 2007.

Meanwhile, US Treasuries followed their equity counterparts down on Thursday even as US consumer prices fell 0.7 percent in January, their biggest drop since January 2008.

The fall in US Treasuries comes amid concerns over another possible crisis in the bond market.

“The risk in bonds has gone up,” Francesco Garzarelli, London-based co-head of macro and markets research at Goldman Sachs Group Inc, said in a Bloomberg Television interview on Thursday. “The sensitivity to small changes in yield expectations from here will command very sizable price swings, and I just think that makes fixed income a very dangerous asset class.”

Wednesday, 25 February 2015

Stocks rise on Yellen comments, Greek deal

Stocks rose on Tuesday.

In the US, the S&P 500 rose 0.3 percent to a new record high after Federal Reserve Chair Janet Yellen indicated in testimony before the Senate Banking Committee that an increase in interest rates is unlikely before mid-year as inflation and wage growth remain too low.

In Europe, the STOXX Europe 600 rose 0.6 percent to a seven-year high. Greece’s ASE Index in particular surged 9.8 percent after eurozone leaders approved a bailout extension for four more months.

The hard part for Greece is still to come though.

“The conditional agreement to extend the current program is just the first hurdle in a long race,” Maria Paola Toschi, global market strategist at JPMorgan Asset Management, wrote in a note to clients on Tuesday. “We expect the negotiation process to continue to blow hot and cold.”

Indeed, in a letter to Jeroen Dijsselbloem, president of the Eurogroup of finance ministers, IMF Managing Director Christine Lagarde expressed doubts about Greece’s reform plan, saying that it is “not very specific” and does not convey “clear assurances” that key reforms will be implemented.

Tuesday, 24 February 2015

Does austerity pay off?

As Greece's plan to tackle its economic problems goes before eurozone finance ministers for approval, the question remains whether austerity as demanded by the latter is the right approach.

While many economists argue against it, saying that it curbs economic growth, an analysis by Benjamin Born, Gernot Müller and Johannes Pfeifer concludes that austerity does pay off in the long run. Its conclusion:

Our results have important implications for policy.

• First, whether austerity is painful in the short run depends on the level of fiscal stress.

As spending cuts cause little harm under benign initial conditions, it is advisable to prevent fiscal stress from building up in the first place. Admittedly, more often than not policymakers will have missed this opportunity. As a result, austerity is likely to be painful in the short run and the temptation to renege on debt obligations increases. Because market participants understand this, they demand a higher default premium. A naïve observer may therefore conclude that austerity “is not working”. In this regard, however, our analysis offers a second important insight:

• If policymakers and the electorate show sufficient resolve, carrying through with austerity will eventually be rewarded by better financing conditions. Austerity pays off in the long run.