No one is ready to call this the start of a correction, let alone a bear market, but global equities are experiencing a mini-slump that has put a growing number of investors on edge. The moves haven’t been big, totaling only about 0.9 percent, but the MSCI All-Country World Index has declined for four straight days, the first time that has happened since early August.
Investors are nervous that the divide in Washington is too wide for tax cuts to happen this year. Plus, some unexpected softness in China has led to questions about the global synchronized economic recovery thesis. And now that earnings season is over, it’s not clear what the next catalyst that will push stocks higher, or at least keep them at these lofty valuations. There’s not a whole lot of margin for error. Bank of America’s latest monthly survey of 206 global fund managers overseeing $610 billion of assets found that a record net 48 percent of respondents indicate equities are overvalued. The most crowded trade is betting on further gains in the Nasdaq Composite Index. The firm also found that a majority of investors are banking on a Goldilocks-like economy, with 56 percent expecting above-trend growth and below-trend inflation.
“Icarus is flying ever closer to the sun, and investors’ risk-taking has hit an all-time high.” Michael Hartnett, the firm’s chief investment strategist, wrote in a research note. “A record high percentage of investors say equities are overvalued yet cash levels are simultaneously falling, an indicator of irrational exuberance.”
TREASURIES IGNORE THE HATERS
A widely followed JPMorgan weekly survey of clients found that sentiment toward U.S. Treasuries is getting worse, and is now more negative than at any time since 2005. So, naturally, bonds rallied on Tuesday. You can’t blame investors for being negative on bonds, especially with the Federal Reserve transitioning to a more restrictive monetary policy program and buying less paper. But when it comes to the bond market, it’s not always about the Fed and interest rates. In times like these, when investors are extra nervous about stocks, junk bonds and other riskier assets, Treasuries are a haven. Also, investors are worried about the shrinking difference between short- and long-term bond yields, which in the past has been a precursor to a slowing economy. Federal Reserve Bank of St. Louis President James Bullard said Tuesday that there’s no need to raise interest rates with inflation below the Fed’s 2 percent target and not poised to quickly return to target. The current interest rate “is likely to remain appropriate over the near term” Bullard remarked in a presentation prepared for delivery in Louisville. Betting against bonds has been a losing trade for years. If anything, when sentiment becomes so extremely negative, like it is now, it could set the stage for a strong rally if the economic data disappoints and caused traders to reverse their bets and go long.
THE EURO IS MAKING A MOVE
After a big rally that saw the Bloomberg Euro Index rise some 11 percent between mid-April and late August, it seems as if Europe’s shared currency had hit a brick wall. For most of the next three months it did a whole lot of nothing. But that may be changing. The index rallied as much as 1.07 percent Tuesday in its biggest gain since June. Not only that, the gauge has now gone six days without falling, the first time it has done that since the end of March and into April 2016. Against the dollar, the euro rose above $1.18 for the first time since Oct. 26. Much of the euro’s strength Tuesday came after the European Union’s statistics office said gross domestic product rose 0.6 percent in the third quarter, keeping the euro-area economy on track for its best annual performance in a decade. In Germany, the expansion accelerated to 0.8 percent, while Italy’s growth picked up to 0.5 percent. Last week, Benot Coeure, a European Central Bank policy maker, went so far as to say that in terms of balance and robustness, the region’s economy is in the best shape since the euro’s birth in 1999. At the other end of the currency spectrum was the greenback, with the Bloomberg Dollar Spot Index falling 0.54 percent Tuesday in its biggest drop since Sept. 7.
BLAME CHINA FOR COMMODITIES SLUMP
The Bloomberg Commodities Index had its worst day since early May, falling 1.20 percent. As is usual whenever the commodities market posts a big move, China was the culprit. Data released Tuesday by the Chinese government showed that industrial production slowed in October, meaning less demand for raw materials. The slowdown wasn’t significant, 6.2 percent growth versus 6.6 percent in September, but it was enough to spook commodities traders following a strong rally over the past three months. Among the biggest losers was nickel, which tumbled by the most in almost two months, falling as much as 5.9 percent to $11,755 a metric ton. A slump that big has happened only a handful of times in the past five years, according to Bloomberg News’ Mark Burton. Aluminum, copper and other base metals also declined. A drop in energy prices also weighed on commodities. Oil futures fell as much as 2.8 percent in New York, the biggest decline in more than a month after touching 2015 highs last week. Bloomberg News’ Jessica Summer reports that hopes that a potential extension of OPEC’s supply curbs will help support the market next year were tempered on Tuesday when the International Energy Agency said recent price gains, along with milder-than-normal winter weather, are slowing demand growth.
FORGET JUNK BONDS. WORRY ABOUT CHINA BONDS
There’s been much concern about the recent softness in the market for speculative-grade corporate bonds and whether it indicates the start of a broad, nasty pullback from riskier assets that have done so well this year. Maybe there’s another canary in another coal mine that bears watching: China’s $9 trillion debt market. The nation’s sovereign bond selloff reached a fresh milestone, with 10-year yields breaching 4 percent for the first time in more than three years and analysts warning that losses are set to accelerate. Bloomberg News reports that yields on debt due in a decade rose as much as four basis points to 4.01 percent on Tuesday, extending their climb since the start of October to 39 basis points even after data this week signaled economic growth is moderating and borrowing has slowed. “The breaking of 4 percent will have significant negative impact on sentiment,” said David Qu, a market economist at Australia & New Zealand Banking Group in Shanghai. “There’s a chance that we will see an extensive and quick slump in bonds in the near term. If sentiment continues to worsen, there will be a selloff in corporate bonds, too, and then the entire bond market will face strong pressures.” Bloomberg News’ Helen Sun and Tian Chen report that the key questions now is, will the selloff ripple into other assets — for example, corporate bonds, which have been reasonably resilient so far — and do policy makers have the appetite, as well as the ability, to put a floor under declines?
On Wednesday, investors and economists will get the latest reading on inflation when the monthly U.S. Consumer Price Index report is released. In all likelihood, the data will show a big drop in the headline number, with the economists at Bloomberg Intelligence calling it a reflection of “payback” from the strength in energy prices seen during September in the wake of Hurricanes Harvey and Irma. The median estimate of economists surveyed by Bloomberg is for CPI to have risen 0.1 percent in October, compared with 0.5 percent in September. Excluding food and energy prices, the index is seen advancing 0.2 percent, in line with its average in recent years and reaffirming the notion that inflation is no closer to reaching the Federal Reserve’s 2 percent target. The year-over-year gain in core CPI was probably 1.7 percent for the sixth straight month.
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