The Daily Prophet: Greed Has a Better Track Record Than Fear

Connecting the dots in global markets.

The plunge in stocks that greeted February was the type of event that should have scared the bejeebers out of investors. And for a nanosecond it did, as the S&P 500 Index fell into a correction for the first time in two years. But if there's anything this bull market has proven after surviving five Federal Reserve interest-rate increases, Brexit, the U.S. elections, North Korean missile tests and various other threats, is that it's resilient.

The S&P 500 index continued its rebound on Thursday, climbing for the fifth straight day. It has risen 5.82 percent in the period, its biggest five-day gain since December 2011. The latest weekly poll of clients by the American Association of Individual Investors shows that 48.52 percent of investors are bullish, above the average of 36.74 percent since the start of the bull market in 2009. At 27.11 percent, the spread between the bulls and the bears has only been wider four times going back to early 2015. Investors seem convinced that even though borrowing costs are on the rise, they are not yet at levels that would hinder equities, especially with the economy gathering pace.

Equities won’t be affected by higher long-term interest rates as long as 10-year Treasury yields stay below 4 percent, according to Gina Martin Adams and Peter Chung, equity strategists at Bloomberg Intelligence. The yields were at 2.90 percent Thursday. “I think with the economy looking so good around the world, that we’ll have an up year,” Steve Schwarzman, the head of  Blackstone Group, the world’s largest private equity firm, said Thursday in a Bloomberg Television interview.

The bond market is dominated by esoteric terms such as yield to worst, duration and spreads that even many market professionals have a hard time understanding. But beyond the jargon, what the bond market is really about is the cost of money. And right now, money is getting expensive, especially for homebuyers. The big increase in yields on benchmark 10-year Treasury notes has translated into higher mortgage rates. Freddie Mac said Thursday that the average rate for 30-year home loans climbed this week to 4.38 percent, the highest since April 2014. The monthly payment on a $300,000, 30-year loan has jumped to $1,499 from $1,394 in September, when the average rate was 3.78 percent, according to Bloomberg News' Prashant Gopal. Developers are unfazed, with a monthly survey from the National Association of Home Builders/Wells Fargo showing confidence among homebuilders held steady this month at near the highest level since 1999. Homebuilders like to say that consumer confidence is a bigger factor in the home-buying process than interest rates. It looks like that theory is about to be tested in a big way.

Get ready for a deluge of Treasury bills, and the increase in short-term funding costs that’s likely to result. Investors are bracing for an onslaught of T-bill supply following last week’s U.S. debt ceiling suspension, leading them to already demand higher rates from borrowers across money markets, according to Bloomberg News' Alexandra Harris. And that’s just a result of the government replenishing its cash hoard to normal levels. The ballooning budget deficit means there’s even more to come later, and that extra supply could further buoy funding costs down the line, making life more expensive both for the government and companies that borrow in the short-term market. Harris reports that concerns about the U.S. borrowing cap had forced the Treasury to trim the total amount of bills it had outstanding, but that’s no longer a problem and the government is now ramping up issuance. Financing estimates from January show that the Treasury expects to issue $441 billion in net marketable debt in the current quarter and the bulk of that is likely to be in the short-term market.

For the gyrations in markets in recent years, the currencies of emerging economy nations have held up remarkably well. The MSCI EM Currency Index is within 0.2 percent of its record close on Jan. 25. In contrast, the MSCI EM Index of equitieswas 5.2 percent below its high on Jan. 26. Emerging-market currencies are holding up on the prospect for continued strong economic growth. The International Monetary Fund said in late January that it expects emerging-market economies to expand 4.9 percent this year, compared with 4.7 percent in 2017. Growth in developed-market economies, though, is expected to be unchanged at 2.3 percent. The Institute for International Finance said Wednesday that it expects to see $1.3 trillion in non-resident capital flows to emerging markets in 2018, topping the estimated $1.2 trillion in 2017. "Despite the deterioration in risk sentiment in recent weeks, we remain cautiously optimistic on the overall outlook for EM capital flows in 2018-19," the Washington-based IIF said in a research report.

Iron ore futures matched their highest closing price since September amid speculation that sustained demand for higher-grade ore -- a key ingredient in the steel-making process -- will help to support the market. What makes the latest move higher in prices even more remarkable is that investors were laying bets on the outlook even as markets in top-user China were closed for a break, according to Bloomberg News' Jake Lloyd-Smith. In Singapore, most-active SGX AsiaClear futures rose to $77 a metric ton, and traded as high as $77.25. Benchmark iron ore’s in a sweet spot as China’s curbs on steel supply to fight pollution have underpinned demand for higher-quality ore, aiding miners including Rio Tinto Group and Vale SA. There’s also speculation that when the restrictions are lifted in March, the likely resurgence in activity by mills will be a plus for iron ore. “Iron ore (or at least high-quality iron ore) will be well supported over the medium term,” strategist at Sanford C. Bernstein wrote in a research note. “A significant part of the quality premium for iron ore is driven by the change in Chinese steel making philosophy, and we expect this to be permanent.”

Savvy investors like to say that correlation isn't causation. That may be true, but here's one correlation they hope is causation. The Chinese New Year begins Friday, and this one is the Year of the Dog. LPL Research points out that the Year of the Dog has historically been strong for equities, with the S&P 500 Index gaining more than 15 percent on average. Of the 12 zodiac signs, none has a better average return for equities, according to LPL. The last Year of the Dog came in 2006, when the S&P 500 rose 12.4 percent. There was an aberration in 1994, however, as the S&P 500 fell 2.3 percent. Of course, that was the year that the Fed surprised markets with a series of unexpected rate increases.

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Welcome to the Post-New Normal Era in Markets: Larry Hatheway

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Fed Is U.S. Bulwark in Asia as China Rises: Daniel Moss

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