Via @connectedwealth Tuesday, June 14th, 2016
The big headline news this morning is the continued drift lower for sovereign yields. Remember the forces at work here, deflationary fears, an insatiable appetite for sovereign debt, and a lack of supply in the face of the ECB buying spree. It’s a milestone moment, but not one we didn’t’ quite see coming.
In front of not only the Brexit vote but also some key central bank meetings (FOMC meets today) risk off is the theme of the moment.
With risk coming off, volatility of course is on the rise. Despite the VIX at 21.94 up 72% from June 7th, the S&P 500 is only down 1.6% from that time. No doubt about it, the equity markets are getting sold off, yesterday 439 companies on the S&P 500 were lower on the day, but oddly enough the move lower seems to be lacking any panic. Knock on wood.
On the currency front, the USD is continuing to make up the ground lost following the disastrous payroll number from the beginning of the month. The U.S. dollar index is trading at 94.79 as we write, the loonie is modestly lower and the Yen remains a safe haven destination. The Yen reached its highest rate vs. the USD since September 2014. The move higher this year has been pretty relentless.
While we’re on Japan, their industrial production ticked higher despite the strengthening Yen. Production rose 0.5% MoM vs. expectations of a 1.3% decline. YoY, it’s still negative but the pace is improving.
More on Sovereign Bond Yields
2016 has been a historic year for sovereign bonds. In Europe, ECB QE and concerns about a Brexit are pushing safe-haven bond yields lower. German 10-year bund yields just fell below zero for the first time ever (see the chart of the day). UK and Japanese bond yields are also at record lows. According to the FT, there are now more than $10tn of sovereign bonds trading at negative yields. Just a few years ago this would have seemed impossible. Even so, unconventional policies, revised expectations about growth & inflation and risk aversion have continued to support bonds. The end result is that interest rates are the lowest they have been in 5000 years.
What is more is than bonds may continue to rally if equities continue to fall. More from the FT here.
China might get some positive news which may give a boost to it ailing stock market. At 5pm EST an announcement is being made and we’ll see if Chinese A shares will now be added to the MSCI Emerging Markets Index (EEM). It’s a big ETF, $21 billion in total assets. This kind of buying power has the ability to move markets. Unfortunately with the short term nature of ETF fund flows, it can swing both ways.
On a lighter note, gamers are getting hyped up as the 2016 E3 Expo begins. It’s the world’s largest video game convention, with a big focus on new hardware, as well as new game titles. Rumours of a new Xbox One are spreading, but it is doubtful that the new Nintendo console will makes its debut. The event is actually losing some headline participants with both EA, Activision and Disney shying away from the event, its future might actually be in doubt. EA for instance is now going to be putting on its own showcase convention. Yahoo has a good article on roundup for the gaming stocks and what to expect at E3.
Ok, how about some generally positive news to balance out the red on the screen today. U.S. Household worth has hit a new record high. LPL Financial, writes on this positive milestone. It’s now $20 trillion above the pre-recession high. Thank you QE and unconventional monetary policy.
But for now, the backdrop of an improving labor market, low interest rates, low inflation, and an all-time high household net worth provides plenty of support for the consumer, and suggests that the economic expansion, even as it turns seven years old later this month, remains intact.
Diversion: Get some coconut tree climbing tips from this superhuman Polynesian dude. He does make it look pretty easy, maybe I’ll climb a streetlight after work. Probably not…
Microsoft has said they will be financing the Linkedin purchase with debt, opposed to using the over $100bb in cash on their balance sheet. The reason being most of that cash is offshore, unable to be brought back because it would be taxed at the corporate tax rate. So instead they are borrowing money at a low rate, with that interest payment being tax deductible. Alibaba is guiding that their sales will grow at 48% this year after growing by 33% last year. The company spent $18.7bb on buybacks and acquisitions last year, fueling that growth in EPS. Penn West seems to have bought themselves more time with their sale of nearly $1bb of assets to Teine Energy. Telus is buying back 1.58mm shares through an arm’s length transaction with a private seller.
Oil is moving lower this morning, approaching $48 a barrel for WTI. This comes despite the IEA lowering their estimate as to when the market will reach equilibrium. Citing that demand continues to rise faster than production. The said the surplus in the first five months of the year is 40% lower than their estimate a month ago. The headwind for prices going much higher is the massive inventory glut that has grown during the past two years. Global supplies have been brought lower by pipeline disruptions in Nigeria and the wild fires in Alberta. Copper prices are still rising this morning as demand from China continues to rise and inventories in rose the most in over a decade last month.
FIXED INCOME AND ECONOMICS
You’re probably tired of hearing about the grinding lower of global bond yields so we’ll reserve commentary on just one fairly important milestone — the 10 year sovereign Bund yield has turned negative for the first time ever this morning to -0.01%. Let’s shift the focus instead to some data instead with advance retail sales climbing by +0.5% during the month of May. That is lower from the +1.3% increase the prior month but did manage to best expectations for a +0.3% gain. Core sales printed on the screws with a +0.3% increase. Combing through the details sees decent numbers with Americans spending more mid-Spring on motor vehicles/parts (+0.5%), electronics (+0.3%), sporting goods (+1.3%), eating and drinking (+0.8%), online (+1.3%) and at the gas station (+2.1%). Building materials purchases fell by -1.8% and for the fourth month in five. Overall, 9 of the 13 major categories improved from prior. Is the overall good report likely to shift the expectations of FOMC committee members (who begin day one of their two day meeting today)? Probably not and the market agrees, currently pricing zero likelihood we get a tightening announcement tomorrow.
Credit rating agencies were in the headlines the past couple days and beginning with S&P choosing to leave South Africa’s sovereign debt rating at BBB- with a negative outlook. Some pundits had suggested that the economic weakness in the nation this year may finally have pushed them into junk territory, but S&P noted that risks have been “rising lately and how much buy-in there is across the political spectrum will gradually reveal itself”. Heading north, Hungary was upgraded back to investment grade status by Fitch but S&P kept it one notch below the threshold at BB+, however with a stable outlook. Questions abound over their political landscape as well with “the key factor holding back the rating now is the difficult predictability of policymaking, weakened institutional framework and maybe also the dependence on the transfers from the EU budget, which is very large” in a statement released by S&P. On a more positive tone, anyone want to lend money to the town of North Andover, Massachusetts? The county was served an AAA credit rating by S&P (the highest quality) on the back of the town’s sustainability, economic development, and ability to handle a stressed scenario. Yes, the town with a population of just 28,300 has a higher rating than that of the U.S. federal government.
We don’t normally talk equities in this section but with the massive move lower in U.S. government bond interest rates and the subsequent relatively muted reaction from American stock indices, a quick tangent we must make. The 10 year nominal Treasury yield this morning has rallied 2.5 basis points to 1.58% at time of writing. The last time we were here was during the 18 bps intraday move on February 11. Ten year U.S. interest swap spread premiums are down to just 1.47% (also the lowest since February 11). The VIX is up $0.99 in pre-market trading to $21.97 for a 50% spike in volatility since Thursday. The last time risk was this elevated was on February 24. Spot gold is $20 away from their 52 week high. The LIBOR-OIS spread (remember this poster child of market risk?) closed yesterday at 26.21 points and just shy of its four year high made recently on June 3. High yield credit spreads remain elevated. But yet the DOW and S&P 500 are only 2.50% short of their record highs? As global equity indices retreat on growth, Brexit and commodity fears, could the U.S. equity market really be the new safe haven asset class? We are scratching our heads as well.
CHART OF THE DAY
Nothing is more dangerous than an idea, when it’s the only one we have.