Stocks Beat Bonds, Dollar for Second Month
Global stocks rose in April, beating bonds, the dollar and commodities for a second month, as gold and copper slumped into bear markets and investors bet equities will benefit from unprecedented economic stimulus.
The MSCI All-Country World Index (SPX) of equities in 45 markets climbed 2.9 percent, including dividends, as the Standard & Poor’s 500 Index increased for the sixth straight month. Bonds of all types returned 1.1 percent on average, the most since July, according to Bank of America Merrill Lynch’s Global Broad Market Index of 20,000 fixed-income securities. The Dollar Index slipped 1.5 percent. The S&P GSCI Total Return Index of 24 commodities dropped 4.7 percent, the biggest decline since May.
About $850 billion was added to global share values and the Japan’s Topix Index capped the best month in 14 years as earnings increased at companies from Microsoft Corp. to Nomura Holdings Inc. Bonds gained, driving yields to a record low, as central banks maintained economic stimulus through debt purchases. The dollar fell as investors sought riskier assets while commodities tumbled on concern China’s growth is slowing.
“Equities are going up, because relative to other asset classes, they remain attractive,” Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, said by telephone on April 26. His firm manages $110 billion. “Interest rates are near historic lows. Commodity prices continue to be volatile. You’re seeing investors look toward equities as a means to get paid.”
The MSCI world index slid 0.6 percent as of 4:34 p.m. in New York while the S&P GSCI gauge dropped 2.1 percent following weaker-than-forecast growth in global manufacturing and private payrolls in the U.S. Treasuries remained higher as the Federal Reserve commitment to asset purchases.
Japanese stocks rose the most among the world’s 45 largest equity markets in April, data compiled by Bloomberg show. Tokyo- based Nomura, Japan’s biggest brokerage, gained 37 percent as quarterly profit more than tripled to a seven-year high.
The Topix surged 13 percent as investors bet Bank of Japan Governor Haruhiko Kuroda’s stimulus plans will end 15 years of falling prices and a weakening yen will boost profits for exporters. Kuroda began his campaign by doubling monthly bond purchases in a bid to reach 2 percent inflation in two years. The Topix has rallied 37 percent in 2013 after eight consecutive monthly gains, the longest stretch since 2006.
The S&P 500 reached an all-time high, extending its gain for the year to 13 percent. About 73 percent of the companies that reported earnings in April exceeded analysts’ profit forecasts, data compiled by Bloomberg show.
Microsoft, based in Redmond, Washington, rallied 16 percent as cost controls helped the world’s largest software maker offset weak demand for personal computers running the new Windows 8 operating system.
“Stock prices are where they are because of improved visibility on earnings, reasonable valuations and good prospects going forward as the economy continues to improve in the U.S. and the rest of world,” Paul Mangus, head of equity research and strategy at Wells Fargo Private Bank in Charlotte, North Carolina, said in a phone interview. His firm oversees $170 billion and owns more equities than benchmark indexes suggest.
While valuations are approaching the most expensive levels in three years, stocks are still trading at a 20 percent discount to historic price-to-earnings ratios. The MSCI world index is valued at 16.5 times reported profits, compared with an average multiple of 20.7 since 1995, data compiled by Bloomberg show.
Even at record highs, U.S. stocks look cheap using a valuation method favored by former Fed Chairman Alan Greenspan that compares earnings with interest payments. Companies in the S&P 500 generate profit equal to 6.4 percent of their share prices, about 4.7 percentage points more than yields on 10-year Treasuries, Bloomberg data show.
Bond and commodity markets reflect concern over slowing global growth and deflation that equity investors have yet to acknowledge, according to John Canally, investment strategist at Boston-based LPL Financial Corp., which has $373 billion in advisory and brokerage assets.
“Stocks are just off in their own world,” Canally said by telephone on April 26. “They’re disconnected from bonds and commodities. That usually doesn’t persist for too long. At some point, they’re going to reconnect. Given where we are in stocks and how poor the macro backdrop’s been, my guess is that the stock market will reconnect down.”
The International Monetary Fund cut its global growth forecast for 2013 on April 16 and urged European policy makers to use “aggressive” monetary policy amid a second year of contraction in the euro area. The world economy will expand 3.3 percent this year, less than the 3.5 percent forecast in January, the Washington-based fund said.
Global stocks have declined during the second quarter in each of the past three years, with losses in the MSCI world index averaging 6.5 percent. The S&P 500 may finish the year at 1,601, according to the average estimate of 17 equity strategists surveyed by Bloomberg. That implies the equity index will be little changed from yesterday’s record close of 1,597.57 for the rest of 2013.
Emerging countries were among the world’s worst performing equity markets, with indexes tracking Peru, Mexico, Colombia, Chile, Russia and China posting losses of at least 2.6 percent, data compiled by Bloomberg show.
OAO Gazprom (GAZP), Russia’s gas-export monopoly, sank 7.4 percent and reached a four-year low on April 22 amid concern the company will reduce dividends.
Cia. de Minas Buenaventura SA, Peru’s biggest precious- metals producer, tumbled 21 percent as profit dropped for a fifth quarter on falling metals prices and output.
Of 26 government bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, all except Japan’s gained in April. Spain’s debt has rallied 8.1 percent in 2013 and Ireland’s 7.9 percent.
The average yield to maturity of securities in Bank of America Merrill Lynch’s Global Broad Market Sovereign Plus Index fell to an all-time low of 1.32 percent on April 29. The index has increased 1.8 percent this year as of April 29.
European government bonds rallied as economists predicted the European Central Bank will cut interest rates at its meeting tomorrow. German 10-year bond yields slipped to 1.18 percent on April 30, the lowest level since July and approaching the record-low of 1.13 percent.
Banks from Goldman Sachs Group Inc. to UBS AG changed their views to forecast a rate cut after gauges of European manufacturing and services for April underscored weakness.
“It’s been a policy and liquidity driven market,” Jim McDonald, chief investment strategist in Chicago at Northern Trust Corp., which oversees about $810 billion, said in a telephone interview. “This is all a reflection of people wanting to get yield, looking at the central banks staying very easy.”
Bonds of all types have rallied 1.7 percent this year as of April 29, according to Bank of America Merrill Lynch’s Global Broad Market Index. Yields on 10-year Treasuries have fallen about 9 basis points, or 0.09 percentage point, since the end of December to 1.67 percent. The yield is forecast to rise to 2.3 percent by the end of 2013, a Bloomberg survey shows.
Local-currency bonds of emerging markets gained on speculation Japanese stimulus plans will spur the nation’s investors to buy higher-yielding assets overseas. The yield on JPMorgan Chase & Co.’s GBI-EM Global Diversified Composite Index dropped 0.33 percentage point, the most since June, to 5.25 percent.
Intercontinental Exchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners, fell about 1.5 percent in April, paring the gain this year to about 2.5 percent. The gauge is forecast to climb to 85.2 by the end of 2013, according to the median of 9 estimates of economists and strategists surveyed by Bloomberg.
The euro was the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes in April, rallying 1.7 percent. New Zealand’s dollar has advanced 5.6 percent in 2013.
British sterling advanced 1.2 percent in April after a report showing the nation’s economy avoided a triple-dip recession dimmed speculation that the Bank of England will boost stimulus. The U.K. currency has lost 3.2 percent this year.
The yen posted the biggest drop in April, falling about 5.7 percent after Japan’s central bank declared a “new phase” of monetary easing, including plans to buy 7 trillion yen ($72 billion) of bonds a month.
Japan’s currency has fallen about 12 percent this year to 97.45 per dollar. The yen is forecast to weaken to 102 by the end of 2013, a Bloomberg survey shows. It hasn’t breached the threshold of 100 yen to the dollar since 2009.
The yuan strengthened 0.7 percent in April and reached a 19-year high against the dollar. People’s Bank of Deputy Governor Yi Gang said on April 17 at an IMF conference in Washington that the currency’s trading band will be widened “in the near future.” The last revision, which doubled the maximum permitted divergence from the central bank’s reference rate to 1 percent, was announced on April 14, 2012.
Oil prices plunged in New York and London as growth in China, the world’s biggest energy user, has grown by less than 8 percent in the past four quarters, the longest streak in at least 20 years.
Brent crude tumbled 7 percent, dropping below $100 a barrel on April 16 for the first time since July and bringing its total loss for the year to 7.9 percent. West Texas Intermediate, the main U.S. grade, slipped 6 percent in April and fell as low as $85.61 on April 18, its weakest intraday level this year. Brent’s wider losses, intensified by a recovery in North Sea supplies following oilfield maintenance, reduced its premium to WTI to less than $9 a barrel yesterday, the narrowest gap since January 2012.
Brent is forecast to average $110 a barrel in the third quarter of this year, according to the median estimate of 38 analysts tracked by Bloomberg.
Gold futures on the Comex in New York fell 7.7 percent in April to $1,472.10 an ounce, the biggest monthly drop since December 2011. The metal slipped into a bear market on April 12 and is headed for an annual loss that would be the first after 12 years of gains. Prices plunged 9.3 percent on April 15, the steepest slump since 1980, amid concern that Cyprus would be forced to sell gold from its reserves and as investors were selling exchange-traded products to buy equities.
“Some people have tried to scare people into buying gold by saying there’s a global inflation problem coming,” said David Kelly, the chief global strategist at JPMorgan Funds in New York. His firm oversees about $400 billion in mutual funds. “There is not a global inflation problem, and there won’t be a global inflation problem until developed economies get closer to full employment.”
UniCredit SpA yesterday lowered its 2013 forecast to $1,500 from $1,700 and said the U.S. probably will end monetary stimulus in the third quarter, curbing investor interest in the precious metal as an inflation hedge. Prices may reach $1,050, Deutsche Bank AG said April 18, while Goldman Sachs Group Inc. forecast $1,390 in 12 months.
Copper dropped 6.4 percent to $7,055 a metric ton in London trading, the most in 11 months, as slowing demand and rising output from the world’s mines leave surpluses. In April, stockpiles tracked by bourses in London, New York and Shanghai reached the highest in more than nine years, data compiled by Bloomberg show. Credit Suisse said April 25 that the metal may slip to $6,000, while Goldman cut its 12-month outlook on April 22 to $7,000 from an earlier forecast of $8,000.
European Union carbon permits for December fell during April after the European Parliament rejected a proposal to delay supply of certificates, which would’ve bolstered prices. The benchmark contract dropped 35 percent to 3.12 euros a metric ton on London’s ICE Futures Europe, the second-biggest monthly decline since February 2008.
“Gold, oil and base metals began to price in slower economic growth,” David Donora, who manages $1.2 billion in commodity assets at Threadneedle Asset Management Ltd., said by telephone from London on April 25. “Slower economic growth takes pressure off resources. On balance, commodities represent better value at these levels.”
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