The Daily Prophet: Stock Traders Have No Patience for Rubio

Connecting the dots in global markets.

Despite the synchronized global economic recovery and the forecasts for higher corporate earnings, it's becoming more and more evident that the fate of U.S. stocks -- and likely those outside the U.S. as well -- are tied to success of the Republican tax plan. That can be seen in the hit U.S. equities took Thursday when Republican Senator Marco Rubio said he intends to vote against the legislation because of the treatment of the child tax credit, throwing a wrench into conference negotiations.

Rubio has been known to oppose legislation proposed by his fellow Republicans only to later rejoin the fold, but in this market where valuations are near record highs investors are not inclined to give Washington the benefit of the doubt. Portfolio managers are the most bearish in their outlooks since the global financial crisis, according to Bloomberg News' Nico Grant. Almost half of managers surveyed by Boston Consulting Group said they were pessimistic about equity markets for the next year citing stretched stock values and rising interest rates as well as U.S. political and geopolitical risks. Eighty percent predicted a recession would start in the next three years.

President Donald Trump, who derided Rubio as “little Marco” as they competed against each other last year for the presidential nomination, said he’s “very sure” the senator from Florida will vote to pass tax legislation next week. Rubio wants more than $1,100 worth of an expanded child tax credit to be refundable -- a measure that would mean larger benefits for working-class parents. He and Senator Mike Lee, a Utah Republican, proposed such an expansion earlier this month -- to be paid for by increasing the proposed corporate tax rate less than 1 percentage point -- but their colleagues rejected that provision.

Critics of the Federal Reserve like to point out how financial conditions are as easy now as when the Fed began the first of its five rate increases in December 2016. In fact, 10-year Treasury yields and 30-year mortgage rates are little changed over the past two years. But there's a very large swath of the financial markets where conditions have tightened greatly. The three-month London interbank offered rate for dollars reached 1.6 percent after Wednesday’s Fed rate increase, up from less than 0.25 percent in 2014 and the highest level since the height of the global financial crisis in December 2008. Despite regulatory efforts to replace Libor following a price-fixing scandal, it still serves as the basis for $350 trillion of financial products and loans in various currencies, according to Bloomberg News' Liz Capo McCormick. “It is the rate of change on an extraordinary amount of debt that is priced off Libor,” Peter Boockvar, chief market analyst at Lindsey Group, told Bloomberg News. “A lot of people have floating-rate debt that repriced to Libor plus some spread and that cost of capital continues to rise.”

Wall Street analysts tend to use euphemisms when making bearish recommendations for fear of offending someone, somewhere. For example, downgrading stock to a "hold" from a "buy" really means you should sell. That's certainly not the case at Goldman Sachs, at least when it comes to the bond market. The firm's strategist made it very clear in a report what investors should do when it comes to the 10-year U.S. Treasury note, the worldwide benchmark: Go short. That was the exact language the strategists used in a report outlining their view that the Fed will deliver much more tightening next year than the market currently expects. They also expect that faster inflation and uncertainty over the rate of inflation will increase term premium on Treasuries, or the extra compensation investors demand to bear the risk of lending money for longer periods of time. "We therefore continue to recommend going short the 10-year Treasury as one of our Top Trades for 2018," the strategists wrote. For one day, at least, the market cooperated, as 10-year yields edged up about 1 basis point to 2.35 percent. The firm sees the yield rising to 3 percent by the end of 2018, data compiled by Bloomberg show.

Thursday was a blockbuster day for central bank watchers, as the European Central Bank, Bank of England and Swiss National Bank were among those that had monetary policy decisions. But it was Turkey's central bank that had the most impact, judging by the foreign-exchange market. The lira was the biggest loser among the 31 major currencies tracked by Bloomberg, falling 1.86 percent in its biggest drop in six weeks. The trigger was the central bank's decision to raise one of its main interest rates by 50 basis points to 12.75 percent. That disappointed investors who hoped the central bank would take more aggressive action to tame consumer prices by raising rates 100 basis points, according to Bloomberg News' Constantine Courcoulas. “The central bank has missed an opportunity to restore a degree of credibility," Lorenzo Gallenga, head of global macro and emerging markets at Quaestio Capital, told Bloomberg News. Rabobank strategist Piotr Matys said the central bank had an opportunity to discourage speculators from betting against the lira by raising rates decisively. Instead, it may have reignited speculation that it has very limited room to raise rates, which leaves the lira exposed to a speculative attack.

Chicken wing prices had been having banner year in 2017, soaring to a record in September. But then, spot prices started to drop, and have slumped in each of the last three months. Prices are  now 14 percent lower than a year earlier, according to one U.S. government measure. Although it's hard to pinpoint a reason for the slump, at least one big producer thinks the recent player-protest controversy in the National Football League is responsible for slower sales of chicken wings, a game-time favorite, according to Bloomberg News' Megan Durisin. “The only thing puzzling me right now is wings,” Joe F. Sanderson Jr., the chief executive officer at Sanderson Farms Inc., told Bloomberg News. “We’ve been talking to our wing customers and they’re the ones that are telling us that they’re seeing less traffic in their stores. They attribute that to the NFL.” Demand for chicken wings usually surges during the Super Bowl. Americans were projected to eat 1.33 billion during last year’s game, according to the National Chicken Council.

There's been much commentary on the narrowing difference between short- and long-term U.S. Treasury yields and how that has historically been a sign that the economy is about to slow, or even fall into recession. Less talked about is how the shrinkage in the so-called yield curve may be just a reflection of international investors taking advantage of a good thing when they see it. Some investors and strategists say that besides low inflation, one reason why long-term Treasury rates have held steady amid the Fed's rate increases is because foreign can get much higher rates in the U.S. than they can get at home. For example, 10-year Treasury notes yield about 2 percentage points more than similar maturity German bunds, the most since at least 1990. On Friday, the Treasury Department will give its monthly update on foreign flows into U.S. financial assets. This year through September, the Treasury's data show that foreign investors bought $317.2 billion of Treasuries, increasing their holdings to $6.32 trillion and reversing two years of declines.


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Corporate Bonds Sour on the Republican Tax Plan: Ben Emons

Why Commodity Traders Should Focus on Equities: Shelley Goldberg

Fault Lines Are Growing at the Federal Reserve: Daniel Moss

Exporters Are Worthy of a Helping Government Hand: Noah Smith

Trump Plays Reagan's Game on Trade and Taxes: Caroline Freund

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