Paul Moore says a day's headlines sheds some more light on longer term trends.
Normally I wouldn’t comment on a single day’s price action, but the order of headlines that greeted me on Saturday morning caught my attention in the light of comments we’ve made over the last quarter, in particular:
- the race to zero rates
- the record valuation dispersion between cyclical stocks (cheap) and growth (expensive), and the rotation between them in September
- record bond and property inflows
- that the macro environment looks OK, but markets aren’t positioned to be OK
With that in mind, here’s the direct copy from my opening financial markets summary page from FactSet. I’ve made small comments in italics.....
- US equities close higher: Dow +1.21%, S&P 500 +1.09%, Nasdaq +1.34%, Russell 2000 +1.79%
Trump says US and China have reached a "phase 1" deal; October tariffs delayed: (positive for the economy)
President Trump, after meeting with lead Chinese negotiator Liu He in the Oval Office this afternoon, said US and China have reached a "substantial phase 1" trade agreement, though it may take five weeks to cast it into writing (after which "phase 2" can be negotiated). The agreement holds the 15-Oct US tariff hikes and reportedly contains provisions involving IP protections, ag purchases, FX transparency, and financial services. USTR Lighthizer added there is an "elaborate" consultation process for enforcement, but added neither December hikes nor Huawei part of the deal. Trump said a formal signing could happen when he and China's Xi meet at the APEC conference in Chile next month.
Fed to resume purchases of Treasuries (just don't call it QE): (positive for financial markets?)
The New York Fed announced today that the Fed will start buying $60B per month in Treasuries beginning 15-Oct. The purchases will continue until at least the second quarter of 2020, saying purchases are needed to maintain ample reserve balances at or above the Sep-19 levels. Also said overnight and term repo operations to continue at least through January next year. Followed Powell statement earlier this week that Fed likely increase size of Fed's balance sheet through short-term Treasury purchases. Powell also stressed that these purchases should not be confused with QE and would not materially influence the monetary policy stance.
Rebound in October consumer sentiment reading: (positive for the economy?)
Preliminary October UMich consumer sentiment reading came in at 96.0, above consensus for 92.0 and September's final 93.2 reading. Current conditions component at 113.4 vs September's 108.5 and Expectations component came in at 84.8 vs prior month's 83.4. Release noted consumers' income expectations rose to their most favorable level in two decades. Added while stronger finances and lower rates bolstered consumer buying plans, still some concerns for pace of overall economy. Observed that ramp in presidential impeachment headlines has not had a significant impact on views of the economy, and that consumption spending may be enough to offset weakness in business investment.
Industrials, materials rally while defensives lag:
Industrials led the market with machinery, road/rail stronger. Materials outperformed. Chemicals, industrial metals were notably higher, with precious-metals miners a drag. Networking and hardware were among the better groups in tech. Oil-services names rallied in energy. Financials boosted by banks, with Treasury yields higher. Consumer discretionary just the tape, helped by auto and apparel firms. Communication services was largely in line. Internets, entertainment were broadly up; telecom group posting more moderate gains. Healthcare a relative underperformer, though most subgroups were better. Select food, HPC names weighed on consumer staples. Utilities and REITs trailed.
UK proposes pared-down free trade deal to end Brexit stalemate: (some positive news?)
Sky News, citing sources, said Britain is proposing move towards a pared-down free trade agreement to get a Brexit deal done by the end of October. This was reportedly the plan presented by UK PM Johnson to Irish leader Varadkar on Thursday. While the report said it will not resolve all of the issues, it could form the foundation for a wide-ranging agreement. Both leaders said they can see a pathway to possible deal in a joint statement. Following meeting, Varadkar also said it is possible to get a deal next week (Reuters). Today's meeting between Brexit Secretary Barclay and EU Brexit negotiator Barnier will determine whether talks intensify ahead of next week's pivotal EU summit (BBC).
More bond inflows: (the herd follows the trend until it breaks?)
Latest Bank of America Merrill Lynch Flow Show report said global bond funds took in $11.1B in the week ended 9-Oct, the 40th straight-week of inflows, as investors faced bearish paralysis. Investors pulled $9.8B from equity funds over the same period amid caution around US and China trade, impeachment, Brexit, and rising risk of recession (Reuters). Over the past six months, $322B have shifted into money market funds, the most since the second half of 2008 during the Lehman crisis. The firm's Bull & Bear indicator up a tick, but still in extreme bearish territory. Recall "Long US Treasuries" has been the most crowded trade in recent BofA-ML Fund Manager Surveys.
This article reflects opinions as at the time of writing and may change. PM Capital may now or in the future deal in any security mentioned. It is not investment advice.