The Daily Prophet: Traders Ignore the Fine Print in IMF Report

Connecting the dots in global markets.

On the same day that the International Monetary Fund raised its forecast for world economic growth to 3.9 percent this year, which would be the strongest expansion since 2011, global stocks hit another high. While the more optimistic outlook helps ratify the recent gains, stronger growth doesn’t ensure further appreciation in equities. Recall that the MSCI All Country World Index fell more than 9 percent in 2011.

In fact, the global corporate and political elite gathering this week in Davos, Switzerland, for the World Economic Forum say they have plenty to be worried about, from potential excesses in financial markets to surging debt levels globally to geopolitical risks, according to Bloomberg News' Enda Curran and Alessandro Speciale. In the U.S., a University of Michigan survey released Jan. 19 showed that a record 66 percent of Americans believe the stock market will climb in the next year. And earlier this month, the Institute for International Finance said the amount of global debt outstanding rose by $16.5 trillion in the first nine months of 2017 to a record $233 trillion, adding to notions that the worldwide economy is awash in debt that  never be paid back.

The big difference between now and 2011 is that back then the European debt crisis was starting to ramp up. In raising their forecast, IMF officials also stressed that the world economy is plagued by uncertainty. And while the U.S. tax cuts may give a lift now, they are worried that it could end up exacerbating America’s trade and budget gaps, leading to a slowdown later. “The bull market seems to be steamrollering over everyone who has a bearish view,” Tim Adams, president of the Institute of International Finance, told Bloomberg News. “But there’s a lot of complacency. There are termites in the foundation and a number of those are gnawing away at night.”

As the world's biggest underwriter of bonds, JPMorgan's views on the fixed-income market carry some weight. So, at a time when there's no shortage of pundits pointing to the recent backup in yields as a sure sign the three-decade long bull market in bonds is coming to an end, it's notable that JPMorgan expects to see a lot more buying from a very important source of demand: pension funds. In a research report late Friday, the firm said it expects pension funds in the Group of 4 economies to purchase at least $640 billion of bonds this year, up from $460 billion in 2017. That's mainly the result of pension fund rebalancing, putting some of the big gains they have enjoyed from equities into fixed-income assets. "We argued before that one of the biggest forces supporting fixed income are the rebalancing flows emanating from multi asset investors who are trying to prevent the equity weightings of their portfolios from rising too much," the firm's strategist wrote in the report. "These investors include, pension funds, Sovereign Wealth Funds, balanced mutual funds as well as retail investors." For one day, at least, the market cooperated, as 30-year bond yields declined in most major government bond markets.

The U.K. sterling is on the type of rally that traders dream about. It has risen over the last week, month, three months, six months and 12 months against a basket of nine other major developed currencies based on data compiled by Bloomberg, the only one of the bunch to do so. Time for traders to lighten up? Hardly. In fact, they are the most bullishpound since before the Brexit vote in June 2016, according to Bloomberg News Charlotte Ryan. Leveraged funds raised net pound longs to 48,051 contracts, the biggest long position since August 2015, while asset managers cut short positions to the lowest since November 2014, the latest Commodity Futures Trading Commission data showd. The options market has also turned positive, with traders positioning for further gains for the first time since 2009 amid bets on dollar weakness. Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole, is advising cuation. “With speculative long positioning close to multi-year extremes, we advise against chasing the currency higher,” he told Bloomberg News. “There is a non-negligible risk of a pullback in cable in response to weaker U.K. data or a renewed spike in Brexit uncertainty,” he adding noting the bank’s three-month forecast is for a decline to $1.33 from $1.39 currently.

During the European debt crisis, traders came up with a derisive acronym for the troubled economies of Portugal, Ireland, Italy, Greece and Spain: the PIIGS. Well, those economies are now firmly on the comeback trail as the euro zone economy picks up steam and their credit ratings start to rise. Spain’s bonds rose for a third day Monday after Fitch Ratings raised its assessment of the country’s debt. The yield on Spanish 10-year securities fell to its lowest in six weeks following Fitch’s one-level upgrade in the sovereign’s debt rating to A- with a stable outlook. While Spanish bonds rallied last week in anticipation of Friday’s move, there was some doubt over whether an upgrade would come too soon in a country that is still grappling with a secessionist push in its largest regional economy, according to Bloomberg News' John Ainger. Shorter-maturity Greek bonds rose after S&P Global Ratings raised the nation’s credit rating by one level to B from B- on Friday. “The new ‘safe haven’ in higher-yielding paper could be the seven-year” Greek bond, Societe General strategists Guy Stear and Klaus Baader write in a research note.

After lagging behind other precious metals last year, platinum is finally outperforming, and hedge funds are taking notice. Money managers increased their bets on a rally for platinum, a commodity used in pollution-control devices for cars,  to the most since September, U.S. Commodity Futures Trading Commission data show. Investors had been pessimistic on prices until the start of this year, but that sentiment changed as signs of synchronized global growth boosted expectations for demand, according to Bloomberg News' Luzi Ann Javier. The metal’s strong correlation to gold is also providing support as a weaker dollar propels alternative assets higher. After Volkswagen AG admitted falsifying pollution data for its cars in 2015, the outlook for platinum had dimmed as purchases of diesel-fueled vehicles fell in Europe. Javier reports that things are now turning around as China starts implementing stricter emissions standards, fueling increased demand for the metal.

In a few hours the Bank of Japan will make an announcement regarding monetary policy. Although no change to interest rates or any other parts of monetary policy is expected, that doesn’t mean the meeting shouldn't be watched closely. More so than perhaps any meeting in recent memory, BOJ Governor Haruhiko Kuroda faces a communication challenge: expressing his usual confidence that inflation is headed to the central bank’s target while cooling speculation that the first step in normalizing policy is nearing, according to Bloomberg News' Toru Fujioka. The BOJ jolted markets on Jan. 9 with a decision to reduce bond purchases at a regular open-market operation. The move helped propel the yen higher in at least eight of the last 10 days versus the dollar amid speculation the BOJ is taking small steps away from ultra-loose monetary policy.

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