Monday, 28 May 2018

Market may be more vulnerable to tightening than realised

The US economy may not be as robust as the Federal Reserve thinks.

Bianco Research President James Bianco told CNBC on Friday that most economists mistakenly believe that leading indicators are signaling an "A+" economy that can withstand rising interest rates.

Bianco said social media is creating a bandwagon effect among survey respondents that is distorting the view of the economy.

"It's more like a B- economy," he said. "It's not this screaming home run that everybody thinks it is based on the survey data."

That could mean that Fed monetary tightening could derail the stock bull market.

Saturday, 26 May 2018

Oil plunges but stocks look a good bet

Markets were mixed on Friday.

The S&P 500 fell 0.2 percent but the STOXX Europe 600 rose 0.1 percent and the Nikkei 225 edged up 0.1 percent.

Crude-oil futures plunged 4 percent following reports that the Organization of the Petroleum Exporting Countries and other major producers may lift production by as many as 1 million barrels a day.

John Augustine, chief investment officer at Huntington Private Bank, said that higher oil production “may result in a weak patch for the energy sector, but for the broader market that could be offset by a rise in sentiment if it results in gas prices falling going into the summer driving season”.

Indeed, Credit Suisse analyst Andrew Garthwaite thinks stocks are a good bet.

“We conclude that a US recession is unlikely until Q3 2020,” Garthwaite wrote in a note to clients Friday. “Remain overweight equities.”

Friday, 25 May 2018

Higher interest rates may be good for stocks but some economists see rate cuts in 2020

Markets fell on Thursday.

The S&P 500 fell 0.2 percent, the STOXX Europe 600 fell 0.5 percent and the Nikkei 225 fell 1.1 percent.

News that US President Donald Trump was cancelling a planned summit with North Korean leader Kim Jong Un had little impact on markets.

However, European and Asian stocks were hit by an announcement by the US government on Wednesday that it was investigating whether new tariffs against imported autos are called for based on national security grounds.

The US 10-year Treasury yield fell 2.2 basis points to 2.981 percent, slightly easing fears of higher interest rates.

On the other hand, a CNBC report has highlighted an analysis by Bill Miller showing that higher interest rates may actually be good for the stock market.

"Looking at the last 20 years — all cases of higher interest rates have been met with a market that's gone higher," Miller said.

Indeed, concerns may soon shift from higher interest rates to weaker economic growth.

A poll of over 100 economists taken 16-24 May showed that US economic growth was forecast to average 2.8 percent in 2018, its fastest pace in three years, but slow to 2.5 percent next year and 1.8 percent in 2020.

The likelihood of a US recession in the next 12 months was seen as 15 percent, around where it has been over the last few years, but that probability doubled to 31 percent over the next two years.

An increasing number of economists expect the Federal Reserve to start cutting interest rates sometime in 2020 compared with previous polls.

Thursday, 24 May 2018

US stocks rise as Fed indicates willingness to keep rates low

Markets were mixed on Wednesday.

The S&P 500 rose 0.3 percent but the STOXX Europe 600 fell 1.1 percent and the Nikkei 225 plunged 1.2 percent.

Markets were initially shaken by US President Donald Trump's remark that he was not really happy with the progress of US-China trade talks and that his summit with North Korean leader Kim Jong Un may not go ahead as planned.

However, the release of the minutes of the last Federal Reserve monetary policy meeting later on Wednesday showed that officials were sanguine about the inflation outlook.

“The minutes from the Fed suggest they are willing to keep rates lower for longer to allow the economy to recover,” said Quincy Krosby, chief market strategist at Prudential Financial.

Wednesday, 23 May 2018

Are stocks “a buy” or “cruising for a bruising”?

Markets were mixed on Tuesday.

The S&P 500 fell 0.3 percent and the Nikkei 225 fell 0.2 percent but the STOXX Europe 600 rose 0.3 percent.

The US 10-year Treasury yield hovered around 3.07 percent, gold inched up 0.1 percent while US crude oil futures fell modestly.

Over the medium term, however, gold has been falling while crude oil has rallied to its highest level in years as the US dollar rallied.

Oppenheimer's head of technical analysis Ari Wald said that this could be a sign of “bullish risk appetite”.

Dennis Davitt, partner at Harvest Volatility Management, said: “Equities are a buy here because they're good hedges against inflation, so the inflationary aspects of oil outside of the dollar are what you should really look towards.”

However, Economic Cycle Research Institute co-founder Lakshman Achuthan was less optimistic.

“Since late last year, consumer spending growth has been easing, as has personal income growth,” he told CNBC. He said that “the risk is rising” and that stocks are “cruising for a bruising”.

Tuesday, 22 May 2018

Markets rise after Mnuchin declares “trade war on hold”, Goldman says interest rates not a problem

Markets rose on Monday.

The S&P 500 rose 0.7 percent, the STOXX Europe 600 rose 0.3 percent and the Nikkei 225 rose 0.3 percent.

Markets were boosted after US Treasury Secretary Steven Mnuchin said over the weekend that the US would delay implementation of tariffs on Chinese goods and “put the trade war on hold” while working out details of a deal between the countries.

Then on Monday, Mnuchin told CNBC that he is “very bullish on stocks”.

“We are well on our way to 3 percent or higher sustained growth,” he said.

While higher growth could put upward pressure on interest rates, the US 10-year Treasury yield was muted on Monday, hovering just above 3 percent.

Goldman Sachs thinks that interest rates are not yet a problem for stocks.

“We expect negative valuation changes if the level of rates approaches 4%, or if the monthly pace of increase exceeds 1 standard deviation (currently 20 bp),” it said in a note.

Goldman economists currently expect the 10-year Treasury yield to hit 3.6 percent by the end of 2019.