Thursday, 25 May 2017

Markets higher as China credit rating cut, US stocks getting overbought

Markets were mostly higher on Wednesday.

The S&P 500 rose 0.3 percent, the STOXX Europe 600 rose 0.1 percent and the Nikkei 225 rose 0.7 percent.

China's Shanghai Composite Index tumbled early in the day after Moody’s Investors Service cut its rating on the country’s debt but recovered to end the day 0.1 percent higher.

In the US, stocks rose despite the release by the Federal Reserve of the minutes of its monetary policy meeting in May showing broad agreement among officials to shrink its balance sheet.

Indeed, Thomas Kee Jr noted that volatility in the US stock market has been low even as it is coming close to being overbought.

“One of our key indicators, what we call the Sentiment Table, is on the verge of saying the U.S. stock market will likely stall and then fall,” he wrote.

Wednesday, 24 May 2017

Markets shrug off Manchester blast amid positive eurozone data

Markets were mostly higher on Tuesday.

The S&P 500 rose 0.2 percent and the STOXX Europe 600 rose 0.2 percent.

However, the FTSE 100 fell 0.2 percent after a bomb explosion in Manchester left more than 20 people dead.

A report on Tuesday showed that the IHS Markit eurozone PMI held a six-year high in May at 56.8 while Germany's flash manufacturing PMI hit a 73-month high of 59.4. Also, Germany's Ifo business climate index rose to 114.6, an all-time high.

Carsten Brzeski, chief economist at ING, wrote that “the entire eurozone economy could become the positive growth surprise of 2017”.

While US flash PMI readings were mixed, Karyn Cavanaugh, senior market strategist at Voya Financial, said that the eurozone data “bodes well for global equities”.

In addition, Raymond James chief investment strategist Jeffrey Saut said that US corporate earnings “are going to continue to surprise on the upside”.

Tuesday, 23 May 2017

Markets mixed as tech sector raises concerns

Markets were mixed on Monday.

The S&P 500 rose 0.5 percent, the Nikkei 225 rose 0.4 percent but the STOXX Europe 600 fell 0.1 percent.

Despite the rebound in the US, some analysts remain concerned about further weakness.

Michael Stanes, investment director at Heartwood Investment Management, wrote in a note on Monday that “we are in the latter part of the market cycle and sentiment is likely to remain vulnerable to pressure points as we move through the year”.

Matt Maley, equity strategist at Miller Tabak, thinks that tech stocks will be key.

Maley wrote that “if they do not play catch-up as we move through the week, it will raise the odds that we'll see more weakness in the stock market before long”.

On the other hand, others think that investors may be putting too much faith in the tech sector.

The Nasdaq Internet index, with a P/E of 61, “is approaching P/E levels that are as spicy as they were in prior ‘big tops’ in stock markets, and at a time where policy is turning less favorable”, BofA wrote in a note to clients.

Morgan Stanley wrote of “concerns that index-level moves have been driven by tech to a large and perhaps unsustainable degree”.

Monday, 22 May 2017

Keep buying the dips

Stock markets experienced a turbulent period last week. The S&P 500 plunged 1.8 percent on Wednesday, and despite recovering on the following two days, ended the week down 0.4 percent.

Some analysts remain sanguine though.

Immediately after the tumble on Wednesday, Terry Simpson, multi-asset investment strategist at the BlackRock Investment Institute, told CNBC: “If we have mini-corrections like today, it could actually be a nice opportunity to put some capital to work.”

Similarly, Nick Colas, chief market strategist at Convergex, thinks that investors should continue to buy the dips in the stock market.

Saturday, 20 May 2017

Stocks continue rebound, tech sector sees big inflows

Markets rose on Friday.

The S&P 500 rose 0.7 percent, the STOXX Europe 600 rose 0.6 percent and the Nikkei 225 rose 0.2 percent.

The S&P 500 ended the week down 0.4 percent but analysts remain hopeful that the downside is limited.

“This week political risk has caught up on the market but it’s still unclear whether it has any legs,” wrote Deutsche Bank strategist Jim Reid and research analyst Craig Nicol in a note on Friday.

“U.S. policy uncertainty is arguably greater than at any time since last November’s elections, but that should not entirely cloud what remains a generally supportive growth backdrop for equity markets, especially in the eurozone,” said Ian Williams, an economist and strategist at Peel Hunt.

The Nasdaq Composite rose 0.5 percent on Friday but fell 0.6 percent for the week.

This week's setback for technology stocks comes after a record-breaking run for the sector that has, according to Bank of America Merrill Lynch, seen money moved into the sector at a rate that, if it keeps up, would mark the biggest inflows to the space in 15 years.

Friday, 19 May 2017

US stocks rebound but analysts see rotation to Europe

Markets were mixed on Thursday.

After the US market plunge on Wednesday, the Nikkei 225 fell 1.3 percent and the STOXX Europe 600 fell 0.5 percent.

However, later on Thursday, the S&P 500 rose 0.4 percent.

JP Morgan said in a note that “equities could see further weakness in the short-term” but “fundamentals remain supportive”.

Meanwhile, a CNBC report suggests that a rotation to European stocks makes sense.

“With the U.S. and Brazil beset by political turmoil and Chinese stocks on the downswing, the big trade of 2017 increasingly looks like a rotation to Europe,” the report said.

“The fundamental backdrop continues to support a positive stance on the European market,” said Ronan Carr, European equity strategist at Bank of America Merrill Lynch.

Thursday, 18 May 2017

Markets fall on Trump turmoil

Markets fell sharply on Wednesday.

The MSCI All-Country World Index fell 1.2 percent as the S&P 500 tumbled 1.8 percent, the Nasdaq Composite plunged 2.6 percent and the STOXX Europe 600 fell 1.2 percent.

The US 10-year Treasury yield fell 11 basis points to 2.22 percent. Benchmark yields in France and Germany fell six basis points to 0.83 percent and 0.378 percent respectively.

Analysts attributed the declines to political turmoil in the US centred on President Donald Trump.

“If he’s preoccupied defending himself and if it goes a lot further, then any hope of his legislative agenda coming to the fore is going to be reduced,” John Stopford, head of fixed-income at Investec Asset Management Ltd in London, said.

“What has been setting in over the course of the day is that political uncertainty is something that’s likely going to be with us for a significant amount of time,” said Dennis Debusschere, Evercore ISI’s head of portfolio strategy and quant.

However, some technical analysts think that further declines will be limited.

Katie Stockton, chief technical strategist at BTIG, said that the S&P 500 has an initial support level of 2,340 but thinks that “a decline of that magnitude will be avoided”.

“For the most part we really do see this contained,” said Sameer Samana, global quantitative strategist at Wells Fargo Investment Institute.

On the other hand, Ilya Feygin, managing director and senior strategist at WallachBeth Capital, thinks that if Trump's proposed tax reforms, deregulation and infrastructure spending are cancelled, “this market is going to go down so hard that we haven't seen anything like it in the last few years”.

Wednesday, 17 May 2017

Markets mixed, investors see higher stock prices despite high valuations

Markets were mixed on Tuesday.

In the US, the S&P 500 fell less than 0.1 percent but the Nasdaq Composite rose 0.3 percent to close at a record for the second consecutive day.

Elsewhere, the STOXX Europe 600 was flat while the Nikkei 225 rose 0.3 percent.

Some investors are concerned about high stock prices.

“Prices aren’t at all justified by valuations or economic data,” said Adam Strauss, portfolio manager at Appleseed Fund. He warned that investors are “taking a lot of risk by staying in the S&P 500”.

Investors, though, appear to be ignoring valuations.

MarketWatch reported that according to investor surveys conducted by Robert Shiller, although 40 percent of both institutional and retail investors view current stock prices as cheap, the lowest since 1999, more than 90 percent of investors expect prices to continue to rise for another year.

And it could get worse. Goldman Sachs wrote on Monday that the earnings momentum that started the year has already shown signs of stalling.

Wouter Sturkenboom, senior investment strategist at Russell Investments, thinks “that profit margins will contract and revenue growth will disappoint”, and that stocks at current levels are “not worth the risk”.

Monday, 15 May 2017

China loans grows but some analysts see no crisis ahead

Data from the People's Bank of China on Friday showed that China's banks extended 1.1 trillion yuan in net new local currency loans in April, rising from 1.02 trillion yuan in March, though household loans fell to 571 billion yuan from 797.7 billion yuan.

Analysts were not alarmed by the data.

“April's credit expansion could have been due to front-load funding demand ahead of regulatory tightening, and the risk tilts to the downside in the coming months,” said ANZ's China economists David Qu and Betty Wang in client note.

Julian Evans-Pritchard, China economist at Capital Economics concluded that “the deceleration in credit growth which began last summer continued uninterrupted last month with a pick-up in loan growth more than offset by a decline in bond issuance”.

Indeed, an article by Bernstein’s Michael Parker and Kelman Li concluded that while China had “lots of debt”, they see “no crisis”.

“So, yes, tightening – in the form of a slowdown in credit formation growth - is likely in the second half,” they wrote. “But that tightening is, in our view, the next step in the rehabilitation of Chinese policy making… and equity markets.”

Saturday, 13 May 2017

Markets mixed, VIX and recession risk falls

Markets were mixed on Friday.

The S&P 500 fell 0.1 percent but the Nasdaq Composite rose 0.1 percent.

Elsewhere, the STOXX Europe 600 rose 0.3 percent but the Nikkei 225 fell 0.4 percent.

The CBOE Volatility index fell 1.7 percent to 10.42.

“No one really knows what it means to have such a low VIX at a time of such high uncertainty, rising rates, high valuations, and corporate profits that aren’t particularly strong,” said Jonathan Angrist, chief investment officer of Cognios Capital. “It is very unusual.”

Meanwhile, recession risk is also falling, according to Morgan Stanley, which places the probability of a US recession over the next 12 months at 25 percent.

“A stronger global backdrop and the delayed promise of tax reform have lowered this assessment from 30% previously,” wrote Ellen Zentner, a Morgan Stanley economist.

Friday, 12 May 2017

Markets fall as investors wait for Fed rate hike

Markets were mostly lower on Thursday.

The S&P 500 fell 0.2 percent and the STOXX Europe 600 fell 0.6 percent.

However, the Nikkei 225 rose 0.3 percent to close at a 17-month high.

Mark Kepner, managing director of sales and trading at Themis Trading, said that “with earnings season almost over, we might see some sideways moves until June when the Fed is likely to raise rates”.

Thursday, 11 May 2017

Stocks rise, oil jumps

Markets mostly rose on Wednesday.

The S&P 500 rose 0.1 percent, the STOXX Europe 600 rose 0.2 percent and the Nikkei 225 rose 0.3 percent.

Markets largely shrugged off President Donald Trump's firing of the FBI director.

Michael Hewson, chief market analyst at CMC Markets, said that “investors don’t appear to be too concerned about the risks of sharp selloffs”.

Stocks were supported by a rally in oil. West Texas Intermediate crude rose 3.2 percent on Wednesday after US government data revealed the biggest weekly decline in domestic crude supplies so far this year. Brent rose 3.1 percent.

However, Tyler Richey, co-editor of the Sevens Report, said that “fundamentals are not yet pointing to a decided break higher in oil prices any time soon”.

Wednesday, 10 May 2017

Markets mixed but bull market "still intact"

Markets were mixed on Tuesday.

In the US, the S&P 500 slipped 0.1 percent but the Nasdaq Composite rose 0.3 percent to close at another record high.

European stocks rose, with the STOXX Europe 600 rising 0.5 percent to end at its highest level since August 2015.

Asian stocks were mixed. The Nikkei 225 fell 0.3 percent but the Hang Seng Index jumped 1.3 percent.

Some analysts remain optimistic.

“The bull market is still intact and in the absence of negative news we may see prices drift higher,” said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research.

“The risk-on trade is in full swing and traders are considering the recent pullback in the European market as an opportunity,” said Naeem Aslam, chief market analyst at Think Markets.

Other analysts are more cautious.

“This is a market that needs an unequivocal solid package of economic data to move higher,” said Quincy Krosby, chief market strategist at Prudential Financial in the US.

There are also doubts on European stocks.

“Market-wise, this is the end of the European rally,” said Steen Jakobsen, chief economist at Saxo Bank, in a note on Monday. “We came into this election convinced that Macron would win and believing euro assets were undervalued; this has now run its course.”

Tuesday, 9 May 2017

US stock market ekes out record, tech seen outperforming

Markets were mixed on Monday.

The S&P 500 rose less than a point but still ended at a record high.

However, the STOXX Europe 600 fell 0.1 percent despite the pro-EU centrist Emmanuel Macron's victory in France's presidential election.

In Asia, the MSCI Asia Pacific ex Japan Index rose 0.8 percent while the Nikkei 225 surged 2.3 percent after returning from a three-day market holiday.

In currency markets, the euro fell against the US dollar after touching a six-month high earlier.

"A Macron win is largely priced into the euro," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

Investor sentiment remained positive though. The CBOE Volatility Index closed at 9.77, its lowest since December 1993.

"We remain largely constructive of the equity market and view that the path of least resistance is higher," said Bill Northey, chief investment officer at Private Client Group of US Bank.

Among stocks, Goldman Sachs sees the tech sector outperforming the broader market.

Monday, 8 May 2017

Macron wins French election

Pro-European centrist Emmanuel Macron won France's presidential election on Sunday.

"I will fight with all my strength against the divisions that are undermining us," Macron said at his campaign headquarters.

Markets reacted positively to the news. S&P 500 futures rose, as did Asian markets in early trading, and the euro rallied to a six-month high.

Saturday, 6 May 2017

US stocks hit records amid good jobs report

US stocks hit record highs on Friday.

The S&P 500 and the Nasdaq Composite rose rose 0.4 percent to close at new all-time highs.

Elsewhere, the STOXX Europe 600 rose 0.7 percent to end at a 21-month high but the Shanghai Composite Index fell 0.9 percent.

US stocks were supported by a good jobs report. The Labor Department reported on Friday that the US economy created 211,000 jobs in April while the unemployment rate fell to 4.4 percent from 4.5 percent.

“April employment data should put to rest concerns that somehow the economy was slowing to a complete stall,” said Stephen Blitz, chief US economist at TS Lombard.

In Europe, investors were focused on the French presidential election on Sunday, where centrist Emmanuel Macron is expected to beat far-right Marine Le Pen.

Peter Donisanu, analyst at Wells Fargo, said that while “the most immediate effect of a Macron win on Sunday would be to ameliorate concerns about the rise of populism in Europe for at least the next few months”, there could be “a short-term ‘buy the rumor, sell the news’ pullback in European risk assets”.

Friday, 5 May 2017

Stocks mostly rise but oil plunges

Markets were mostly higher on Thursday.

The S&P 500 rose just under 0.1 percent and the STOXX Europe 600 rose 0.7 percent.

However, earlier on Wednesday, Asian stocks mostly fell. The Shanghai Composite fell 0.3 percent.

Oil plunged, weighing down energy stocks, especially in the US. West Texas Intermediate crude and Brent fell 4.8 percent.

In Europe, investor sentiment improved after a televised debate between French presidential candidates Emmanuel Macron and Marine Le Pen suggested that the market-friendly centrist Macron remains favoured to win the election.

Thursday, 4 May 2017

Markets slip as Fed holds but summer rate hikes could trigger correction

Markets were mostly lower on Wednesday.

The S&P 500 slipped 0.1 percent, the STOXX Europe 600 fell less than 0.1 percent and the Shanghai Composite fell 0.3 percent.

After a monetary policy meeting, the Federal Reserve released a statement on Wednesday saying that the slowing in growth during the first quarter is “likely to be transitory” and that job gains were “solid”.

“That officially puts two more interest-rate increases on the table,” said Matthew Peterson, chief wealth strategist at LPL Financial.

The yield on the US 10-year Treasury note rose four basis points to 2.32 percent on Wednesday.

On Tuesday, Jeffrey Gundlach, chief executive officer of DoubleLine, had said he expects the 10-year Treasury yield to move higher, and a summer interest rate rise should “go along with a correction in the stock market”.

Wednesday, 3 May 2017

Markets rise amid robust US earnings and strong eurozone manufacturing

Markets rose on Tuesday.

The S&P 500 rose 0.1 percent, the STOXX Europe 600 rose 0.8 percent and the MSCI Asia Pacific Index rose 0.4 percent.

Robust corporate earnings helped US stocks maintain their upward momentum, with Phil Orlando, chief equity market strategist at Federated investors, declaring that the “earnings recession is over”.

However, Mislav Matejka, an equity strategist at JP Morgan Cazenove, wrote in a note that “the near-term risk-reward might be getting less exciting” as “[s]ome of the positive catalysts we have been looking for, such as a robust earnings season and the easing in political tail risks, have delivered and are now behind us”.

European stocks rose after coming back from holidays after Greece reached an agreement with its creditors on austerity measures to be taken for the next tranche of bailout money.

Markets were also boosted by strong manufacturing data. A report from Markit on Tuesday showed that its eurozone manufacturng PMI rose to 56.7 in April, the highest since 2011.

Tuesday, 2 May 2017

US stocks rise as Nasdaq hits record but Europe looks cheaper

Markets rose on Monday.

The S&P 500 rose 0.2 percent while the Nasdaq Composite rose 0.7 percent to another record high.

Earlier on Monday, the Nikkei 225 rose 0.6 percent while most markets in Europe were closed for holidays.

US stocks were boosted by an agreement reached over the weekend to keep the US government funded.

Meanwhile, even as US tech stocks continued its record-breaking run, many analysts think that there's probably more to come.

“If you look across the board, tech fundamentals have been very good in internet, software, and semiconductors, so there's been a good backdrop,” Joshua Spencer, portfolio manager at T. Rowe Price, told CNBC last week.

European stocks could also be set to outperform.

Michael Batnick wrote that European stocks have underperformed US stocks over the past few years. “That underperformance combined with investors’ attitudes toward European stocks — which are apathetic at best — has caused the valuation gap between US and European equities to widen into a gulf,” he wrote.

Batnick concluded that “with the difference in valuations, the recent performance, and investor flows, it might be time to consider investing at least a portion of your portfolio outside the United States”.

Monday, 1 May 2017

How overvalued are stocks?

CNBC's Alex Rosenberg asked: Just how overvalued are stocks? He looked to Jeremy Siegel and Robert Shiller for answers.

... In a Wednesday interview on CNBC's "Trading Nation," Shiller, a Yale University professor of economics, said that the market "hasn't been this overvalued except for a couple times in history—around 1929, around 2000."

Shiller is referring to the cyclically adjusted price-earning (or CAPE) ratio...

... Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School ... says the CAPE ratio is now giving off a false signal.

... "We are in a low interest rate world. We shouldn't use a 10-year lagging average now, especially with the growth that we're seeing."

There is a problem in comparing Shiller with Siegel.

Robert Shiller is probably most famous for writing the book Irrational Exuberate in 2000 that suggested that the stock market was overvalued just as it hit a peak.

Jeremy Siegel is probably most famous for writing the book Stocks for the Long Run that showed that stocks have returned an average of 6.5 percent to 7 percent per year after inflation over the last 200 years.

In other words, while Shiller has shown some prescience in forecasting for the short to medium term, Siegel is only known for his forecast for the very long term.

John Hussman did a thorough analysis of market valuation in his article last week "Valuation Breakevens" and concluded that "current valuation extremes present a hostile combination of weak prospective return and steep risk".