Saturday 30 July 2016

S&P 500 near record high even as BoJ looks like "spent force"

The US stock market hovered near record levels on Friday after a mixed session.

The S&P 500 index closed up 0.2 percent to 2,173.60, just under last Friday’s all-time closing high of 2,175.03, after briefly touching a record intraday high of 2,177.13. However, the Dow Jones Industrial Average fell 0.1 percent.

US economic data on Friday were disappointing. The economy grew at a slower-than-expected 1.2 percent annual growth rate in the second quarter while first-quarter growth was revised to a 0.8 percent annual rate from the previous estimate of 1.1 percent growth.

Elsewhere, the STOXX Europe 600 Index fell 0.9 percent while the Nikkei 225 rose 0.6 percent.

Earlier, though, the Nikkei had fallen as much as 1.8 percent amid disappointment over the Bank of Japan's decision to limit additional stimulus to just enlarging its programme of buying exchange traded funds by 2.7 trillion yen a year.

“The market expected more,” said Hisao Matsuura, chief strategist at Nomura Japan.

However, some doubt that more would be helpful anyway.

Michael Schuman wrote that BoJ Governor Haruhiko Kuroda “has already thrown everything into his fight to save Japan”. The BoJ already holds a third of all outstanding government bonds, yields on many of these bonds are already negative, and the total assets of the BoJ have more than doubled in just the past three years.

Schuman suggested that “three years into his radical program to restart Japan, the BOJ might just be a spent force”.

Similarly, Ivan Martchev wrote: “Given that the Japanese have run a QE program since 2013 that is three times more aggressive than the Fed's QE program (relative to the size of GDP), and officials have still not gotten the results they were looking for is rather telling.”

“It may be simply too late for Japan,” he added.

Friday 29 July 2016

Stocks flat in US, fall in Europe and Japan

US stocks were relatively flat on Thursday.

The Dow Jones Industrial Average fell 0.1 percent but the S&P 500 rose 0.2 percent.

The rise in the S&P 500 leaves it just 0.2 percent from its record high.

Despite that, Michael Scanlon, managing director at Manulife Asset Management, thinks that “it doesn’t seem like there’s a tremendous amount of upside”.

Indeed, elsewhere, the STOXX Europe 600 fell 1 percent and the Nikkei 225 fell 1.1 percent.

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.

Thursday 21 July 2016

Stocks rise as indices in US and Hong Kong point to new bull markets

Markets rose on Wednesday.

The S&P 500 rose 0.4 percent to close at a record high.

The STOXX Europe 600 rose 1.0 percent to a four-week.

Asian stocks were mostly higher. The MSCI Hong Kong Index in particular rose 1.1 percent to push gains since the January low to more than 20 percent, putting the market back in bull market territory.

Indeed, David Moenning said that the US stock market may also be said to be in a new bull market. The Dow Jones Industrial Average has advanced 18 percent from the February 11 low, which meets Ned Davis Research's definition of a bull market.

Wednesday 20 July 2016

Markets mixed but US stocks are "only game in town"

Markets were mixed on Tuesday.

The S&P 500 fell 0.1 percent but the Dow Jones Industrial Average rose 0.1 percent, its eighth consecutive gain and its sixth consecutive record close.

Elsewhere, the STOXX Europe 600 fell 0.4 percent but the Nikkei 225 jumped 1.4 percent.

The WSJ's MoneyBeat blog pointed out that US stocks "are looking as stretched as they've been in more than five years", with the S&P 500 P/E ratio at 19.4, the highest since February 2010.

Nevertheless, some analysts think that stock valuations could remain elevated for a while yet. As Convergex noted, US stocks are "the only game in town".

Tuesday 19 July 2016

US stocks at fresh highs

US stock markets closed at fresh highs on Monday amid otherwise-lacklustre global markets.

The S&P 500 rose 0.2 percent, as did the MSCI world equity index.

However, oil fell. Brent crude settled 1.37 percent lower while US crude fell 1.55 percent.

The US 10-year Treasury yield declined 1 basis point to 1.585 percent while the 10-year Bund yield fell 3 basis points to -0.023 percent.

While US stocks remain resilient, the run of record highs for the US stock market "doesn't make much sense", distressed debt specialist Marc Lasry told CNBC on Monday.

However, Lasry said that the market may be signalling a stronger-than-expected US economy.

Indeed, even the usually-bearish John Hussman wrote on Monday that while stock valuations indicate roughly zero nominal total returns for the S&P 500 on a 10-12 year horizon, "our near-term outlook is rather neutral, largely because enough trend-following components have improved".

Monday 18 July 2016

US Treasuries stumble, but rally may resume

US Treasury prices fell last week, with the 10-year yield jumping 22.7 basis points to 1.594 percent.

The fall last week reversed the rally that had sent yields to record lows.

Analysts are divided on where bonds go from here.

Last week, Tom di Galoma, managing director at Seaport Global Holdings, lowered his 10-year yield outlook for the next six to nine months from 1.4 percent to 0.9 percent.

“Treasurys are just too cheap compared to a lot of global debt,” said di Galoma. “As the yields on global debt get more and more negative, we will rally more and more.”

Buying from Japanese investors appears to have been a major driver of the rally. Japan’s Ministry of Finance reported on Wednesday that Japanese investors last week bought $25.4 billion worth of US debt.

However, James Kochan, chief fixed-income strategist at Wells Fargo Funds Management, thinks that the 10-year yield will end the year between 1.75 percent and 2 percent as the US economy shows signs of improvement.

“The post Brexit [global] rally was temporary,” said Kochan. “But the selloff would come domestically.”

Saturday 16 July 2016

Markets mixed after record-breaking run amid "bear capitulation"

Markets were mixed on Friday.

The S&P 500 fell 0.1 percent, ending a run of four consecutive record closes, but the Dow Jones Industrial Average rose 0.1 percent to an all-time high.

The STOXX Europe 600 fell 0.2 percent but the MSCI Emerging Markets Index rose 0.2 percent.

The US 10-year Treasury yield rose six basis points to 1.60 percent.

West Texas Intermediate crude rose 0.6 percent but gold fell 0.4 percent.

Despite the weak performance on Friday, stocks have made a strong run recently. Bank of America Merrill Lynch reported in a note on Friday titled “Bear Capitulation” that investors last week poured the most cash into global equity funds since October last year and the second highest amount ever into emerging market bond funds.

Meanwhile, the Wall Street Journal reported that “market professionals are generally cautiously optimistic that the U.S. bull market ... is primed for an extended run”.

“So far,” said Douglas Coté, chief market strategist for Voya Investment Management, “2016 is reminiscent of past stealth bull markets, climbing a wall of worry despite obstacles in its way.”

Friday 15 July 2016

US stocks hit new highs amid "mass psychosis"

Stocks rose on Thursday.

The S&P 500 rose 0.5 percent to hit its fourth consecutive record high. The Dow Jones Industrial Average rose 0.7 percent for its third consecutive record high.

Elsewhere, the STOXX Europe 600 rose 0.8 percent as the Bank of England left interest rates unchanged while the Nikkei 225 rose 1 percent.

The US stock market's record-breaking run has not impressed some asset managers.

"I don't think we should be at new highs," said Larry Fink, CEO of BlackRock, the world's largest asset manager.

Jeff Gundlach, founder of Doubleline Capital, said the recent moves were the result of "a mass psychosis going on related to the so-called starvation for yield".

Tuesday 12 July 2016

S&P 500 hits record high on low rates

Stocks rose on Monday, with the S&P 500 in particular hitting a record high.

The S&P 500 rose 0.3 percent to 2137.16, breaking a record that had remained intact since May 2015.

In Japan, the Nikkei 225 surged 4 percent after Japanese Prime Minister Shinzo Abe’s ruling coalition won more seats in the upper house.

In Europe, the STOXX Europe 600 jumped 1.6 percent while the FTSE 100 rose 1.4 percent to put it back in bull market territory.

“Ultralow rates are just driving the stock market,” said Bruce Bittles, chief investment strategist at Robert W. Baird.

Russ Koesterich, head of asset allocation for BlackRock’s Global Allocation Fund, thinks that “the ability to move higher going forward is going to come down to a better economy and stronger earnings growth”.

Some analysts are skeptical the market can continue to move higher.

“Markets have become very dovish relative to what central banks might deliver and against the current macro backdrop,” Goldman Sachs said in a note on Monday. “Bonds could sell off sharply as a result of central bank disappointment, positive inflation and data surprises and/or illiquidity, which would likely drive weakness in equities and other risky assets, at least initially.”

To John Hussman, the recent optimism among investors is a “mistake”. In his latest commentary on Monday, he wrote that “the main factor driving financial markets here is a yield-seeking race to the bottom” and that while prices have been driven higher in the near term, future prospects for investment returns have been “obliterated”.

Monday 11 July 2016

S&P 500 approaches record high but faces earnings test

After a strong rebound that has taken it back to its all-time high, the US stock market faces challenges in maintaining the rally.

The S&P 500 rose 1.3 percent last week to 2,129.9, just 0.2 percent below the 2,134.72 high reached in May 2015, after briefly trading above the latter on Friday.

In the process, the S&P 500 has erased the losses suffered following the referendum in the UK where voters chose to leave the European Union.

Patti Domm at CNBC wrote that stocks “could easily break out to new highs in the week ahead, as earnings become the next test for the market”.

“I think we're going to go higher over the next few months. I think we're going to go to 2,200. We're going to have a breakout in optimism,” said James Paulsen, chief investment strategist at Wells Capital Management. “I think economic momentum is returning.”

Wharton professor of finance Jeremy Siegel thinks so too. “If we get a good second half of the year earnings-wise, then I think the market could be up 10 to 15 percent,” Siegel told CNBC on Friday.

That optimism is not shared by Matt Kadnar at GMO. Kadnar told Brett Arends at MarketWatch that the overall investment outlook is dismal. “There is no asset out there that is cheap,” said Kadnar.

And investors may not be as optimistic as the advance in the S&P 500 would suggest. CNBC noted that the recent rally in the S&P 500 has been driven by defensive sectors such as utilities, telecom and consumer staples.

“That could be a precursor to an economic slowdown,” it suggested.

Saturday 9 July 2016

Stocks and bonds rise after strong jobs gain

Stocks were mostly up on Friday.

The S&P 500 rose 1.5 percent. It briefly rose above its record closing level in intraday trading after being boosted by a report that US nonfarm payrolls rose by 287,000 in June, the biggest increase since October.

Elsewhere, the STOXX Europe 600 jumped 1.6 percent but the Nikkei 225 fell 1.1 percent.

Despite the strong employment report, US Treasuries also gained, with the 10-year yield falling to a record low of 1.366 percent.

“The economy is chugging along, creating some jobs, but the Fed is still unlikely to do anything for a while,” said Erik Davidson, chief investment officer at Wells Fargo Private Bank.

Friday 8 July 2016

Markets mixed, US recession looms amid low bond yields and continuing profit declines

Markets were mixed again on Thursday.

The STOXX Europe 600 rose 1.1 percent but the S&P 500 fell 0.1 percent and the Nikkei 225 fell 0.7 percent.

US crude oil weighed on stock markets, tumbling 4.8 percent.

The US 10-year Treasury yield rose to 1.387 percent, up for a second day.

Still, low bond yields have already triggered recession concerns.

“Recession unfortunately looms, that is what the bond market tells us,” Steve Cortes, chief strategist at BGC, told FOX Business Network.

“Yields are going the wrong way really quickly,” said Dan North, chief economist at Euler Hermes North America. “We don’t see a recession in 2016 but it raises concerns for 2017.”

In the meantime, the earnings recession in the US is already about to hit the one-year mark. Second-quarter profits from S&P 500 companies are expected to decline by 5 percent, the fourth-straight quarterly drop, according to S&P.

Thursday 7 July 2016

Markets mixed as flattening yield curve trigger recession concerns

Markets were mixed on Wednesday.

The S&P 500 rose 0.5 percent and the Shanghai Composite Index rose 0.4 percent but the STOXX Europe 600 fell 1.7 percent and the Nikkei 225 fell 1.9 percent.

US crude oil rose 1.8 percent while the yield on the US 10-year note rose to 1.385 percent from 1.367 percent on Tuesday.

While bond yields rose on Wednesday, they remain near record lows, a sign to many that the economy may be close to a recession.

“Whenever we see the yield curve flatten like we are seeing right now, that usually signals a market that's anticipating a recession and further monetary stimulus from the central banks,” said Craig Erlam, senior market analyst at Oanda.

“Given the historical tendency of a very flat or inverted yield curve to precede a U.S. recession, the odds of the next economic downturn are rising,” wrote a team of Deutsche Bank analysts.

Wednesday 6 July 2016

Markets fall as bond yields tumble to record lows

Markets fell on Tuesday.

The S&P 500 fell 0.7 percent, the STOXX Europe 600 fell 1.7 percent and the Nikkei 225 fell 0.7 percent.

There were pockets of strength among stocks, with the FTSE 100 gaining 0.4 percent and the Shanghai Composite Index rising 0.6 percent.

Nevertheless, the general shift from risk was clear.

US crude oil plunged 4.9 percent while gold rose 1.5 percent and the US 10-year Treasury yield fell to a record low of 1.367 percent.

And bond yields continued their declines early on Wednesday with Japan’s 20-year government bond yield dropping to zero for the first time. The 10-year note yield fell to a record minus 0.265 percent, while the 30-year yield reached an unprecedented 0.03 percent.

Tuesday 5 July 2016

Markets mixed, analysts see subdued second half year

Markets were mixed on Monday.

Precious metals led commodities higher, with silver in particular surging as much as 7 percent before settling with a 2.9 percent gain.

However, Brent crude slipped 0.5 percent.

In equities, the Shanghai Composite Index jumped 1.9 percent but the STOXX Europe 600 fell 0.7 percent.

The US stock market was closed on Monday having closed on Friday at 2103 and analysts see little further improvement for the rest of the year.

Eighteen equity strategists tracked by research firm Birinyi Associates expect the S&P 500 to finish the year at roughly 2150. That forecast is down from a forecast of 2200 at the beginning of the year.

Saturday 2 July 2016

Markets rise as central banks look at further easing

Markets rose on Friday to continue their post-Brexit rebound.

The S&P 500 rose 0.2 percent, the STOXX Europe 600 rose 0.7 percent, the FTSE 100 jumped 1.1 percent and the Shanghai Composite Index crept up 0.1 percent.

Commodities rose, with silver surging as much as 6.3 percent and West Texas Intermediate crude closing 1.4 percent higher.

The yield on US 10-year Treasuries fell three basis points to 1.444 percent.

“As bad as things have gotten, central banks have talked about new types of easing -- that’s going to keep a bid under equities,” said Andrew Brenner, head of international fixed income at National Alliance Capital Markets.

Mohamed El-Erian, the chief economic adviser at Allianz SE, told Bloomberg that US 10-year yields “can go to 1.25 percent quite easily if we continue to see this combination of more central bank activism and a slowdown in Europe”.

Friday 1 July 2016

China stocks rise but interest rates may fall

The Shanghai Composite Index rose 0.1 percent on Friday to complete a 2.7 percent rise for the week.

Despite the recovery in the stock market, China's bond traders are betting on more monetary stimulus. From Bloomberg:

Expectations a plunging euro and rising political uncertainty in Europe will hurt demand for Chinese products is boosting speculation the People’s Bank of China will take steps to ease monetary policy. Australia & New Zealand Banking Group Ltd., Standard Chartered Plc and Commerzbank AG all say the nation will probably lower banks’ reserve requirements as soon as July, while one-year interest-rate swaps, a gauge of rate expectations, fell the most last month since April 2015.

The latest data on China's economy have been mixed. The manufacturing PMI slipped to 50 in June from 50.1 in May but the non-manufacturing PMI rose to 53.7 from 53.1.