The Daily Prophet: Forget the Trump Bump. It's the McCain Gain

Connecting the dots in global markets.

Senator John McCain was the toast of Wall Street on Thursday. The Arizona Republican, who was seen as a wild card after voting this summer against repealing Obamacare, said he will support the Senate tax bill -- putting his party's leaders one step closer to passing their overhaul. Stocks soared, with the Dow Jones Industrial Average rising more than 1 percent for the first time in 72 days, breaking its longest stretch ever without such a move.

At the least, the gains add to a stronger-than-average year for equities: The Dow is up 22.8 percent and the S&P 500 Index has gained 18.3 percent. But perhaps more encouraging is the way the rally is transforming. While the bull market was largely led by small group of big technology-related shares for much of the year, its so-called breadth is expanding in what is usually deemed a sign of health. Both the number of stocks trading above their 52-week highs and those trading above their 200-day moving averages have been rising. Also, the links between stocks have loosened to one of the lowest levels since at least 2011, according to Bloomberg News' Lu Wang. The realized correlation between the S&P 500 and its top stocks, or the degree to which they move together, has averaged 0.2 this year, down from 0.4 in 2016 based on data compiled by Bloomberg. A reading of 1 means they move in tandem. “That’s part of the healthy bull market, to not just to have the same old stocks” lead, Michael Purves, Weeden & Co.’s chief global strategist, told Bloomberg News.


Don't mistake the animal spirits with irrational exuberance. A large portion of big investors hate stocks. 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 BULL MARKET IN BONDS LIVES
The global bond market made a bit of a comeback in November. The Bloomberg Barclays Global Aggregate Index had risen 0.95 percent this month through Wednesday, and should still be up when the final numbers are tallied, even though U.S. Treasures suffered a minor dip on Thursday. The gain followed declines of 0.38 percent in October and 0.90 percent in September. Fixed-income markets were bolstered by strength in longer-maturity debt amid signs that inflation is no jeopardy of accelerating anytime soon. To understand just how sanguine bond investors are, take a look at the benchmark 10-year U.S. Treasury. The note's yield, which serves as a benchmark for everything from U.S. mortgages to borrowing costs for municipalities, fell in November to as low as 2.3 percent and topped out at 2.41 percent. That’s the narrowest range since 1979, according to Bloomberg News' Brian Chappatta. Even with volatility largely suppressed, the rate has swung about 32 basis points on average every month over the past five years. “The 10-year yield remains entrenched in the consolidative range,” Marty Mitchell, an independent rates strategist and formerly head government bond trader at Stifel Nicolaus, wrote in a research report Wednesday. The Bloomberg Barclays Global Aggregate Index is up 6.85 percent so far in 2017, putting it on track for its best year since gaining 9.48 percent in 2007.



OPEC DEALS, TRADERS SHRUG
Maybe it's a case of buy on the rumor, sell on the news, but oil traders don’t seem very impressed by the deal OPEC and its allies outside the group including Russia reached to maintain oil production cuts until the end of 2018. Oil prices were little changed Thursday at about $57.30 a barrel, putting the market on track for its first weekly decline since the start of October. Since the pact started a year ago, global inventories have fallen and prices risen by more than $20 a barrel, but in a rare display of unanimity OPEC meeting ministers agreed the job wasn’t complete, according to Bloomberg News. By keeping the 1.8 million barrels a day of cuts in place for a further nine months, the oil producers aim to return stockpiles to their five-year average without overheating the market and eliciting a new flood of shale oil. But here's the rub: OPEC ministers didn’t have a detailed discussion about the mechanism that will be used to review the deal in June, Iranian Oil Minister Bijan Namdar Zanganeh told reporters. Past OPEC agreements to curb production have fallen apart as weaker members cheated on their quotas by pumping more oil than they agreed to in order to bolster revenues for their economies. “It’s not a clean nine-month extension, so that’s going to hurt their efforts, at least price-wise in the short-term,” John Kilduff, a partner at hedge funds Again Capital, told Bloomberg News.


EMERGING MARKETS TAKE A HIT
Wednesday was a bad day for emerging-market stocks. The MSCI EM Index tumbled 1.87 percent in its biggest drop since May. Much of the declines can be attributed to weakness in Asian technology stocks following the big selloff in the U.S. on Wednesday. Like so many dips before it, this latest bout of weakness may prove to be just a buying opportunity. The Institute for International Finance said Wednesday that net capital flows to emerging markets are on track to exceed $115 billion in 2017, a marked improvement from outflows of $550 billion in 2016 and $620 billion in 2015. In the wake of huge reserve losses in 2015 and 2016, EM central banks have accumulated more than $120 billion of currency reserves this year, putting their economies on stable footing to weather any downturns. Along with  the synchronized global economic recovery, emerging-markets are benefiting from a boom in trade despite the Trump administration's protectionist policies. The International Monetary Fund projects the volume of trade in goods and services will climb 4.2 percent this year, up from 2.4 percent in 2016. That would be the first time trade has outpaced output growth since 2014 and harks back to the pre-crisis days when such outperformance was a regular occurrence, according to Bloomberg News' Enda Curran and Andrew Mayeda.



JAPAN'S MAKING A COMEBACK
One of the hot ideas in markets these days is to go long Japan. The economy has stabilized and the threat of deflation has receded. After a slow start, the nation's stock market has come on strong. The benchmark Topix index has surged 22.8 percent since mid-April, compared with 13.6 percent for the MSCI All-Country World Index. Despite a string of data falsification scandals of late, Japanese companies have gotten back into good shape as measured by the debt scores given by credit-rating firms, according to Bloomberg News' Tesun Oh. The number of upgrades and shifts to positive outlooks of local firms came to 181 so far this year, the most since 2007, based on the combined total of all cases by Moody’s Investors Service, S&P Global Ratings, Rating & Investment Information and Japan Credit Rating Agency. Upgrades and positive outlooks exceeded downgrades and negative outlooks by 68, also the most in 10 years. Japanese companies’ current profits rose 23 percent from a year earlier in the second quarter to a record 22.4 trillion yen ($201 billion), according to Finance Ministry data released Sept. 1. Rising demand from tourists, a recovery in domestic consumer spending and a building boom ahead of the 2020 Tokyo Olympics may be helping to bolster corporate earnings, according to Tetsuya Yamamoto, deputy general manager at Japan Credit Rating in Tokyo.



TEA LEAVES
It's been a tough week for the bears, and it's not over yet. The Institute for Supply Management will release its monthly index of U.S. manufacturing activity on Friday. The median estimate of economists surveyed by Bloomberg is for group's index for November to dip slightly to 58.3 from the 58.7 recorded in October. Nevertheless, the index will still be close enough to the 13-year high of 60.8 posted in September that it shouldn't put a dent in animal spirits. According to the economists at Bloomberg Intelligence, the current levels of the ISM index are typically associated with an economy growing at a strong 3.5 percent pace. There's one big caveat: the BI economists believe the ISM may be overstating the economy's prospects, potentially due to survey participants becoming overly bullish on the outlook for favorable treatment in the tax-reform proposals.

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