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Markets might look calm, but they are behaving abnormally The pessimistic view is years of loose monetary policy have made investors complacent By Gillian Tett
FT, 21 June 2018
Do markets look a little weird right now? That is a question many investors might be asking. In recent weeks geopolitical tensions have intensified, and the monetary policy cycle is turning in both the US and Europe.
Equity markets quivered on Monday, which was the day after China said it would retaliate against new US tariffs by imposing tariffs of its own, but the jitters were modest. Indeed, the MSCI world equity index is up 10 per cent up for the past 12 months – never mind that pesky trade war.
This is odd. But what is more striking – and alarming – is that equity valuations are far from the only bizarre feature of today’s markets. If you peer into the weeds of global finance, you will see peculiarities sprouting all over the place.
Consider credit. These days, pundits often wail about the rising risks attached to corporate debt. A survey from Bank of America Merrill Lynch shows that 42 per cent of asset managers now think that developed world companies have borrowed too much money– beating a previous 2008 peak of 32 per cent.
No surprise there, perhaps: corporate borrowing has indeed soared, amid numerous leveraged buyouts and mergers, and almost half of all US corporate bonds issued this year carry a risky rating of triple B-plus, triple B or triple B-minus. What is startling is that investors are not running scared. Instead, demand for risky debt is so high that the spread between safe and hazardous corporate debt (bonds rated triple A and triple B respectively) is a wafer-thin 50 basis points. In 2012 it was 200bp.
The second puzzle is the so-called dollar “term premium”– the US Federal Reserve’s calculation of the extra compensation investors require to convince them to tie up their money in longer term bonds rather than rolling over a series of short-term ones. Normally this would be positive in this stage of the business cycle. The Fed is raising rates, inflation is edging up and the US government will sell lots more debt in the coming years, due to tax cuts and rising budget deficits. But the US term premium has been zero in recent months. More peculiar still, JPMorgan calculated that the global yield curve has recently inverted for the first time since 2007.
A third oddity is the lack of correlation between currencies and interest rates differentials. Derivative prices currently suggest that investors expect to see a widening gap between US, European and Japanese interest rates. Citigroup calculates that the spread between projected overnight rates for dollars and euros is 250 basis points, up from 25 basis points in 2016 and 100 basis points last year.
In past economic cycles this gap has led to a stronger dollar. That has recently appeared – a bit. On a trade weighted basis, the dollar is 5 per cent stronger than in February, but it is also 4 per cent lower than it was at the start of the year. The correlations seem to have broken down, as Catherine Mann, Citi’s chief economist, points out.
The list goes on – and on. Ms Mann thinks it is odd that house prices keep surging in countries such as Denmark, the Netherlands and Canada, even as the monetary policy cycle turns; and that investors keep rushing into US equity markets, even though valuations should favour non-US assets. Then there is the fact that gold prices have fallen 5 per cent in the past two months – even though geopolitical turmoil normally boosts the price of gold. And the Vix index (which reflects expected US equity market volatility) has recently fallen below 15, after rising above 30 earlier this year. That looks completely counter-intuitive given the geopolitical risk – and the fact that some investors holding Vix derivatives suffered big losses a mere four months ago, when this index gyrated.
So what explains these odd features? One optimistic explanation might be that investors are so wildly confident about global growth that they presume companies will tackle their debt and produce earnings that justify the share prices. Under this theory consumers would continue paying down their mortgages, as inflation remained low (perhaps because digital disruption will suppress labour costs). But there is another pessimistic explanation: years of ultra-loose monetary policy have made investors so complacent that they are mis-pricing risk.
I fervently hope the first explanation is true. But I fear the second is a more likely bet. Either way, the key point is this: don’t assume that markets look “normal” today even if they are (mostly) calm, especially not in a geopolitical world that looks anything but peaceful, let alone normal.
This guys opinion is always good copy and a 'guru' well worth listening to! He has always been pretty darn good when in comes to judging the markets.............5:33s onwards for stock market(s) opinion.
Argus!
0
Calm Before The Storm? on 16:59 - Jun 22 with 8200 views
Interest rates are about to go up, apparently to fund the NHS, they've wasted billions yr in yr out yet its us who as always have to pay for their incompetence as always, while the incompetent ones enjoy their lavish lifestyles, corrupt as fuk and what if the markets tumble will the interest rise still go to fund the NHS...................
Opps this post has nothing to do with this thread, apologies for jumping in with both feet without first reading the post and then just going on a rant
Calm Before The Storm? on 16:07 - Jun 22 by Wingstandwood
This guys opinion is always good copy and a 'guru' well worth listening to! He has always been pretty darn good when in comes to judging the markets.............5:33s onwards for stock market(s) opinion.
Interesting guy and he makes some good points. Enjoyed it. Thanks.
Always looked at an unstable market place as an opportunity, so it’s good for anyone with a bit of spare cash. Especially with pension flexibility these days and not being forced to buy an annuity product on your retirement date.
Calm Before The Storm? on 16:59 - Jun 22 by max936
Interest rates are about to go up, apparently to fund the NHS, they've wasted billions yr in yr out yet its us who as always have to pay for their incompetence as always, while the incompetent ones enjoy their lavish lifestyles, corrupt as fuk and what if the markets tumble will the interest rise still go to fund the NHS...................
Opps this post has nothing to do with this thread, apologies for jumping in with both feet without first reading the post and then just going on a rant
[Post edited 22 Jun 2018 17:05]
bank of England meeting in August to possibly increase base rate by 0.25
Lord_Jack increasingly detached from the riches of kicking a ball
Dont be the one left holding the stock when the music stops.
Most lessons were not learned from 2008. Those that were have been circumvented in many cases. Does anyone have a clue, even beyond the here and now? Really?
- Countries have printed trillions of dollars of QE and still do - Interest rates have dragged along the floor for years and some have even been at negative rates - Corporate borrowing rates at an all time low. Borrow, borrow, borrow. Let somebody else pick up the tab. It will be a similar outcome here to a Corbyn government...tank. - FS businesses have learned if they fck up, taxpayer will pay - Risk models are often bollox. Economic forecasts are bollox. Everything is being kicked down the road for short term gain. At some point, everyone has to pay up - Hyper inflated housing markets. How much can you pump up that balloon before it bursts?
Its all interlinked. The financial environments are no longer balanced - they are inconsistent, flawed and far too complicated to spot a major fhuck up until its too late.
We have been here before.
"Michu, Britton and Williams could have won 3-0 on their own. They wouldn't have required a keeper."
I've heard of a Fibonacci number, what the fuddy ruck is a Fibonacci retracement?
Its a top and tail. Effectively a mathematical min and max. The whole bit he wrote was a technical way of saying the outlook is a positive one based on the funky methodologies they use.
Which is fine in 'normal' circumstances, but its not an even playing field anymore. We all blame the system, but the problems are behavioural and they are human.
If anyone has interest in this stuff, the film "The Big Short" simplifies a lot of these things down based on 2008. Kinda fun film tbh, and there are similarities in many of the characters to those you come across in real life in these places.
"Michu, Britton and Williams could have won 3-0 on their own. They wouldn't have required a keeper."
Calm Before The Storm? on 16:59 - Jun 22 by max936
Interest rates are about to go up, apparently to fund the NHS, they've wasted billions yr in yr out yet its us who as always have to pay for their incompetence as always, while the incompetent ones enjoy their lavish lifestyles, corrupt as fuk and what if the markets tumble will the interest rise still go to fund the NHS...................
Opps this post has nothing to do with this thread, apologies for jumping in with both feet without first reading the post and then just going on a rant
[Post edited 22 Jun 2018 17:05]
Thank you Wolf of Wall Street.
Yes it’s true,if the Fed puts up interest rates then an already over bloated,fragile market will come tumbling down.
The Dow will be trashed but unlike 08, this time round there’s no kithchen sink to throw at it.
PROUD RECIPIENT OF THE THIRD PLANET SWANS LIFETIME ACHIEVEMENT AWARD.
"Per ardua ad astra"
Calm Before The Storm? on 11:59 - Jun 23 by PozuelosSideys
Its a top and tail. Effectively a mathematical min and max. The whole bit he wrote was a technical way of saying the outlook is a positive one based on the funky methodologies they use.
Which is fine in 'normal' circumstances, but its not an even playing field anymore. We all blame the system, but the problems are behavioural and they are human.
If anyone has interest in this stuff, the film "The Big Short" simplifies a lot of these things down based on 2008. Kinda fun film tbh, and there are similarities in many of the characters to those you come across in real life in these places.
Indeed, however Technicals often prevail when the BBs (Big Boys / Banks) are on a march - human sentiment is simply bypassed and the sheep have to jump on board
Master the Technicals, is all. A modest 1700 pt rise in the DJ30 - not an insignificant investment
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