Tuesday 30 June 2015

Markets fall, face summer of discontent

Markets fell on Monday following last week's failure to resolve the Greek debt crisis and as the country shut lenders and imposed capital controls.

The S&P 500 fell 2.1 percent while the STOXX Europe 600 fell 2.7 percent. Yields on US 10-year Treasuries fell 15 basis points to 2.33 percent while yields on 10-year Greek bonds surged 423 basis points to 15.08 percent.

The euro fell against the yen but managed to recover from early losses against the US dollar.

While Monday's decline left the S&P 500 down 0.1 percent for 2015, Mark Hulbert says that Greece by itself is too small to have much impact on the global markets.

Ron Insana agrees, but points out that with China's stock market tumbling, Puerto Rico also having debt repayment problems and the Federal Reserve poised to raise interest rates, there is still a risk of "a summer of discontent for equity- and bond-market investors".

Monday 29 June 2015

Greece sends markets into turmoil, Chinese stocks plunge

The decision by Greek Prime Minister Alexis Tsipras to put the bailout plan to a referendum has caught investors on the wrong foot. From Bloomberg:

For Europe stock traders who went all-in last week speculating on a Greek resolution, it’s time to rethink the strategy.

U.S. stock-index futures tumbled, and gains that pushed the Euro Stoxx 50 Index up 4.8 percent, including the largest one-day rally in three years, are at risk after Prime Minister Alexis Tsipras said he would put terms of the Greek bailout to voters. A Capital Markets Commission official said the Athens Stock Exchange will remain shut on Monday.

It’s a measure of how rapidly sentiment has shifted that the latest breakdown followed a week in which Greek shares posted their biggest increase since 2008, rising 16 percent. Six days ago, investors were celebrating signs the impasse was breaking as European policy makers said reforms submitted by Tsipras were a positive step.

Indeed, markets were in turmoil early on Monday. China's stock market lost 3.3 percent despite the People's Bank of China announcing a rate cut over the weekend.

Friday 26 June 2015

Morgan Stanley says Chinese stocks peaked amid plunge

China's stock market plunged over 7 percent on Friday. Morgan Stanley thinks that more declines are likely.

From Bloomberg:

Morgan Stanley is calling the top of China’s stock rally.

The brokerage predicts the Shanghai Composite Index will fall between 2 percent and 30 percent over the next 12 months, according to Jonathan Garner, Morgan Stanley’s chief Asia and emerging market strategist...

The “balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and ChiNext has now taken place,” Garner wrote in a note dated Friday. “This is probably not a dip to buy.”

Wednesday 24 June 2015

Finishing line to Greek debt deal now visible

It looks like Greece will be able to avert default for the time being. From Bloomberg:

Euro-area finance ministers will meet for the third time in a week on Wednesday to try to secure an agreement to avert a default in Greece.

With a week to go before the country’s bailout expires, a deal appeared within reach after Greek Prime Minister Alexis Tsipras signaled he was ready to end a bitter five-month standoff and reach agreement with creditors to unlock aid...

“We have now seen enough progress for the finishing line to have become visible,” Erik Nielsen, a Unicredit SpA economist in London, wrote in a note to clients. “Failure from here is difficult to envisage...”

“I am absolutely convinced that in a few days an agreement will be reached,” Spanish Prime Minister Mariano Rajoy said on Tuesday...

Investors appear to share the optimism. Greek stocks rose on Tuesday, the Athens Stock Exchange Index jumping 6.1 percent after surging 9 percent on Monday. The yield on Greece's two-year bond fell 329 basis points to 21 percent.

Friday 19 June 2015

Greece headed towards euro exit

It looks like Greece will be leaving the euro area. From Bloomberg:

Greece lurched closer to an exit from the euro as a meeting of finance officials to reach a deal over aid dissolved in acrimony, forcing leaders to call for an emergency summit for Monday...

Greece and its creditors -- the ECB, the IMF, and the European Commission -- seem further apart than ever after four hours of closed-door talks. Without a settlement, the ties still binding Greece to the currency bloc may begin to unravel with funding keeping Greek banks afloat under scrutiny...

Asked if he could imagine Greece being forced out of the euro, Jeroen Dijsselbloem, the Dutch minister who leads the group of euro-area finance chiefs, said, “The way it goes now we’re going in that direction.”

Tuesday 16 June 2015

Markets fall but US stock market rally may not be over

Markets fell on Monday.

In stock markets, the S&P 500 fell 0.5 percent after earlier losing as much as 1 percent. The STOXX Europe 600 fell 1.6 percent, with Greece’s ASE Index in particular dropping 4.7 percent.

The failure of Greece's debt talks weighed on investors' minds, with bond markets also affected.

Spain’s 10-year bond yields jumped 17 basis points to 2.41 percent. Portugal’s 10-year bond yields rose 22 basis points to 3.25 percent. Greece’s jumped 56 basis points to 12.32 percent.

Among commodities, copper fell 1.2 percent to a three-month low while West Texas Intermediate crude oil dropped 0.8 percent.

Notwithstanding the market declines on Monday, some analysts think that the US stock market rally is not over.

A recent report by the Royal Bank of Canada said that most bull markets end because the economy goes into recession. RBC thinks that currently, the risk of a recession is low.

John Higgins, chief markets economist at Capital Economics, told CNNMoney that he thinks the stock market is actually not very expensive and that "the market will track a sideways path; edging very slowly higher".

Higgins' comment comes even as the Wall Street Journal MoneyBeat blog reports that a method Warren Buffett once said was his preferred measure for evaluating the market is indicating that stocks are looking expensive.

Back in 2001, the legendary investor said that the “single best measure of where valuations stand” was the ratio of the value of publicly-traded companies in the U.S. to the country’s gross national product.

As of the end of the first quarter, the market capitalization of the companies listed on the New York Stock Exchange and the Nasdaq is about 150%, or 1.5, of GNP. By that calculation, the metric some have called the “Buffett Indicator” is now at its highest level since the dot-com era and above its historic norm of 119% over the past two decades.

Monday 15 June 2015

Greece debt talks fail, Asian markets fall

Talks between Greece and its creditors have failed. Reuters reports:

Talks on ending a deadlock between Greece and its international creditors broke up in failure on Sunday, with European leaders venting their frustration as Athens stumbled closer toward a debt default that threatens its future in the euro.

European Union officials blamed the collapse on Athens, saying it had failed to offer anything new to secure the funding it needs to repay 1.6 billion euros ($1.8 billion) to the International Monetary Fund by the end of this month.

Greece retorted it was still ready to talk, but that EU and IMF officials had said they were not authorized to negotiate further. Athens insists it will never give in to demands for more pension and wage cuts...

Following what it called this "last attempt" at a solution, the EU's executive Commission said euro zone finance ministers would now tackle the issue when they meet on Thursday.

Asian markets were the first to react to the failure on Monday and were predictably negative.

However, the biggest falls were in China, where the Shanghai Composite Index fell 2.0 percent after the China Securities Regulatory Commission released a draft plan on Friday stopping brokerages from lending to individual clients with average daily assets of less than 500,000 yuan over the 20 past trading days.

Friday 12 June 2015

Asian central banks may be blowing bubbles

Bloomberg reports that Asian central banks may be inflating asset bubbles again.

Recent years have seen reams of research on the role of central banks in inflating asset-price bubbles. The latest developments in Asia suggest that more may be coming...

The central bank of New Zealand Thursday lowered interest rates even in the face of a booming property market in the nation’s largest city. South Korea followed suit, potentially encouraging gains in household debt levels that are already at a record. The Reserve Bank of Australia governor Wednesday said he may lower rates again, even as he wrung his hands over what he dubbed as “crazy” Sydney house prices.

Asian central bank monetary easing is being driven by concerns of weakening economic growth.

“Asian central bankers are between a rock and a hard-place -- easing further risks stoking bubbles, but sitting on your hands isn’t an option either,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong...

“A fine balance needs to be struck,” said Neumann of HSBC. “Easing just enough to keep growth up while not blowing ever-larger bubbles. It’s an almost impossible balance to strike.”

In my opinion, without stronger macroprudential measures to dampen asset bubbles or better fiscal policies to boost growth, balance is impossible from monetary policy alone.

Wednesday 10 June 2015

US stocks end flat but in “precarious position”

The US stock market ended its losing streak on Tuesday with the S&P 500 closing flat.

However, European stocks declined for a sixth straight day on Tuesday, with the STOXX Europe 600 falling 0.4 percent. Emerging markets fell for the 12th consecutive day, the longest losing streak in 25 years.

Bonds also fell on Tuesday with the yields on US, German and UK 10-year government bonds all rising to the highest in months.

While the US stock market managed to avoid losses on Tuesday, Robert Prechter, president of Elliott Wave International, says that the US bull market is in a “precarious position”. With sentiment at extreme optimism but momentum and breadth of advance waning 6.25 years into the bull market, Prechter thinks that “the stock market is at high risk of a sharp collapse”.

Tuesday 9 June 2015

Stocks fall amid waning breadth

Stocks fell on Monday.

The S&P 500 fell 0.7 percent. The index is now down more than 2 percent from its peak reached on 21 May.

The Dow Jones Industrial Average fell 0.5 percent and is now down for the year.

Elsewhere, the European STOXX 600 index fell 0.9 percent. The German DAX 30 index in particular fell -1.2 percent and is now down 10 percent from its closing peak in April.

The recent trend has also not been very favourable. According to Bloomberg, market breadth has been thinning. About 59 percent of stocks closed above their 200-day moving averages at the end of last week, the lowest percentage in eight months.

Wednesday 3 June 2015

Goldman: Stocks too expensive for buybacks

Goldman Sachs thinks US stocks are expensive and that now is not the time for companies to buy back their own stock. From Bloomberg:

Goldman has published a note recommending companies stop spending their cash on buying back their overpriced shares and instead use those overpriced shares to buy other companies' equity. As the bank puts it, "U.S. equity valuations look expensive on most metrics," with the typical stock in the S&P 500 now trading at a price equal to more than 18 times forward earnings.

Goldman also noted that the last time buybacks were this high was in 2007, right before equities crashed during the financial crisis.

Monday 1 June 2015

Blodget: US stocks expensive and at risk of crash

Henry Blodget at Business Insider thinks that US stocks are "frighteningly expensive and risky".

What my analysis is telling me is:

1) stocks are extremely expensive and will eventually revert toward historical means, probably via a sharp correction of 30% to 50%

2) long-term stock returns from today's level will be about 2% per year — nothing to write home about

High valuations and imminent monetary tightening by the Federal Reserve were two reasons given by Blodget in his above post for his bearish views.

And in a separate post, he wrote that margin debt is now higher than it was at the peak of the bull markets in 2000 and 2007.

That creates a risk that a correction in the market could turn into a crash.