The Daily Prophet: Tech Wreck Reversal, BRICs and Gasoline Glut

Connecting the dots in global markets.

It's hard to believe that it was only a week ago that alarm bells were sounding over a rout in technology-related shares that was being calling the "tech wreck." More than a few prognosticators were whispering about an end to the eight-year-long bull market in stocks. Fast forward to today and major stock indexes are at new highs, with the S&P 500 rising 0.83 percent in its biggest gain since April 24, led higher by companies such as Apple, Nvidia and Google.

What many doomsayers failed to realize is that the broad economy is in decent shape even as optimism fades that President Donald Trump will be able to push through pro-growth fiscal stimulus measures anytime soon. The latest monthly survey of economists puts growth at 2.2 percent this year, unchanged from the May survey. “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go,” Federal Reserve Bank of New York President William Dudley said Monday. “This is actually a pretty good place to be.”



Equities globally attracted $24.6 billion in fresh cash for the week ended June 14, most in 30 weeks, with U.S. stock funds attracting the most in 26 weeks, according to Bank of America Merrill Lynch. It appears that strategists are struggling to keep up with the market's gains. The latest monthly survey by Bloomberg released Monday shows that the median year-end estimate for the S&P 500 Index rose to 2,425 from 2,400 in May's poll. The gauge closed Monday at 2,453.25.

MORE PROOF THAT THE EURO IS IN HOT DEMAND

It wasn't too long ago that concerns over the rise of populism across Europe rekindled speculation of a possible breakup of the euro currency bloc. Now, Commodities Futures Trading Commission data show that leveraged funds increased their euro positions to “net long” for the week ended June 13 for the first time in more than three years, according to Bloomberg News' Stefania Spezzati. The euro is the top-performing Group-of-10 currency versus the dollar this year, climbing more than 6 percent. J.P. Morgan Asset Management has increased its exposure to the euro and European equity markets in the past few months, while Western Asset Global Management, which has been underweight the shared currency since 2011, began buying it in December and boosted its position through April. Robeco Groep, which oversees 150 billion euros ($168 billion), said last week it opened a new long position in the shared currency versus the pound. Emmanuel Macron’s victory in French parliamentary elections, an agreement between Greece and its creditors to release new loans and the defeat of the anti-establishment party Five Star Movement in the local vote in Italy are making investors more confident about the outlook for the shared currency.



BRICS ARE MAKING A COMEBACK
Resurgent growth is reviving one of the past decade’s hottest trades. Emerging-market investors are again piling into the so-called BRIC nations -- Brazil, Russia, India and China -- pushing monthly inflows and stock prices to almost two-year highs, according to Bloomberg News' Ben Bartenstein and Aline Oyamada. Non-resident portfolio flows into BRIC nations rose to $166.5 billion last month, from $28.3 billion of outflows 12 months prior, data compiled by the Institute of International Finance and EPFR Global show. Chinese equities saw their biggest quarterly inflows in two years, while traders piled into Indian bonds at the highest level in almost three years, Bloomberg data show. The bet is that a pickup in the global economy will fuel demand for the countries’ commodity exports, drive an expansion of middle-class consumption and help them shore up fiscal accounts. In the decade ended Dec. 30, 2012, developing-nation equities had annual returns of 17 percent, twice those of developed nations. That changed in the taper tantrum years amid fears that the Fragile Five, which included Brazil and India, would struggle to meet high external funding needs. Responding to changing sentiment, Goldman Sachs shut its BRIC fund in October 2015 after losing 88 percent of its assets since a 2010 peak.



WHAT U.S. SANCTIONS THREAT?
Speaking of Russia, the nation sparked a lot of discussion among traders on Monday. First, news that Russia warned that it may treat U.S.-led coalition aircraft over Syria as targets following the shooting down of a Syrian warplane, contributed to the biggest slide in the ruble since May 4. The currency's decline was exceeded only by that of the South African rand among the 31 major currencies tracked by Bloomberg. Then, news came that Russia is tapping international bond markets for the first time this year, betting demand from yield-starved investors will eclipse the prospect of tougher U.S. sanctions. The dollar-denominated bond deal, again managed solely by state-controlled VTB Capital, is the first new issuance from Russia's government since its return to foreign debt markets under sanctions a year ago, according to Bloomberg News' Ksenia Galouchko and Lyubov Pronina. That deal was shunned by some of the biggest global investors and wasn’t admitted by the international clearing house Euroclear SA until two months after its sale. This latest deal will be immediately available for international clearing, said a person familiar with the matter, and is expected to be priced on Tuesday.



AMERICA IS AWASH IN GASOLINE
Hedge-fund pessimism about crude prices is spilling into gasoline markets, even at the time of year when demand is highest. With the U.S. awash in gasoline, money managers for the first time on record were bearish on the fuel in the month of June, when the driving season is heading for its peak, according to Bloomberg News' Jessica Summers. West Texas Intermediate crude prices surged by almost a third in the week through June 13, U.S. Commodity Futures Trading Commission data show. That increase in short positions on oil was the biggest in five weeks. Oil plunged below $46 a barrel earlier this month when Energy Information Administration data showed total U.S. stockpiles of crude and product jumped by the most since 2008. Last week, futures breached $45 as the EIA said gasoline supplies surged to the highest level since mid-March. On Monday,  WTI for July delivery, which expires Tuesday, closed at $44.20 a barrel on the New York Mercantile Exchange, down 54 cents. Futures have fallen 18 percent this year. Adding to the stress, OPEC said its production climbed the most in six months in May as Libya and Nigeria revived output. The International Energy Agency warned that if both countries continue to increase output, those extra barrels will delay OPEC’s goal to rebalance the market.

 

TEA LEAVES
MSCI will announce its annual update on Tuesday, and the focus will be on China, followed by Saudi Arabia, Argentina and South Korea. China’s $6.8 trillion onshore market is the world’s second-largest and accounts for 9 percent of global stock value, dwarfing that of Hong Kong, the main proxy for Chinese exposure. The index compiler will announce in the afternoon New York time whether it has approved Chinese-listed companies, known as A shares, after three rejections. MSCI has previously cited issues such as capital controls and long trading halts as reasons for not bringing mainland shares into the global financial community. MSCI’s revamped method reduced the number of mainland-listed companies to 169 from 448, large firms than can be bought using Hong Kong links to exchanges in Shanghai and Shenzhen. The plan, published in March, also removed any stock halted for more than 50 days in the past year. Despite the amendments, a Bloomberg survey in April showed only six out of 13 strategists and fund managers said inclusion would happen this year.

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