The Daily Prophet: Stocks Are Back in the Black But No One's Happy

Connecting the dots in global markets.

It's starting to feel like the good old days of 2017 in the stock markets. The S&P 500 Index is up 4.82 percent over the past two weeks, while the MSCI All-Country World Index has gained 3.30 percent, and both turned positive for the year on Tuesday for the first time in four weeks. Now all that's needed to keep the rally going is a little optimism on the part of investors. 

Bank of America's Merrill Lynch's widely-parsed monthly investor survey was released Tuesday and it showed that investors with $543 billion under management had a net 29 percent allocation toward equities, the lowest in 18 months. In March, they were 41 percent overweight equities. At the same time, a net 5 percent of money managers, the fewest since June 2016, project the international economy to be stronger in the next 12 months,  while those expecting profits to improve over the next 12 months fell to an 18-month low of 20 percent. What's the takeaway? This month's rebound in stocks from the losses in February and March is less about confidence in equities and more about investors covering their short positions after successfully anticipating the drop in markets the last two months. The latest data show that short interest in U.S. stocks surged in the first half of March by the most since 2015, reaching a four-month high.

The thing about so-called short squeezes is that they allow the bears to reset positions at more attractive levels. “There’s less reason to behave like it’s ‘Morning in America’ than ‘Happy Hour in America,”’ Morgan Stanley strategists including Michael Zezas, Matthew Hornbach and Andrew Sheets wrote in a research note Tuesday. Markets are “closer to the end of the day than the beginning.”

If the long-predicted bear market in bonds has arrived, traders don't seem to be too concerned. That can be seen in Bank of America Merrill Lynch’s MOVE index. The measure of anticipated volatility in the market for U.S. Treasuries dropped below the 50 mark on Monday for the first time in three months. It is now closer to its record low of about 44 than it is to its high for the year of about 72 in early February. The decline in the measure may suggest traders increasingly doubt the Federal Reserve will follow through on its plan to raise interest rates at least two more times this year, especially with signs the economy may be slowing. The Atlanta Fed's widely followed GDPNow, which aims to track growth in real time, showed the economy is likely expanding at rate that is just below 2 percent. Then there's the relentless flattening of the yield curve, a trend that has typically presaged slower growth. The difference between two- and 10-year Treasury note yields has shrunk to 42.5 basis points, the slimmest margin since 2007 and down from this year's high of 78 basis points in February. There's no shortage of investors and strategists forecasting that the yield curve will invert, which has preceded every recession in recent history. “The flattening of the yield curve that we’ve seen is so far a normal part of the process, as the Fed is raising interest rates, long rates have gone up somewhat -- but it’s totally normal that the yield curve gets flatter,” John Williams, who takes the helm of the Federal Reserve Bank of New York in June, said Tuesday in Madrid.

On a cold January day in 2015, the Swiss National Bank provided the currency market with perhaps its biggest shock of all time. That's when policy makers decided to abandon the franc’s cap, allowing it to appreciate above 1.20 to the euro. The franc strengthened to 0.78 centimes per euro that day and gained 21.7 percent against a basket of major market currencies as measured by Bloomberg Correlated-Weighted Indexes. But now, more than three years later, things are finally getting back to normal. Having touched a three-year low of 1.19 per euro on Tuesday, the franc is now less than a centime away from the 1.20 mark. While the 1.20 level is largely symbolic, the franc’s weakening provides a potential milestone for SNB President Thomas Jordan and his colleagues, which may allow them to start imagining how to take interest rates back into positive territory after a decade on the front lines of unconventional monetary policy, according to Bloomberg News' Catherine Bosley. Already, the SNB appears to be scaling back its interventions, taking advantage of a weaker franc thanks to a pickup in euro-area growth and an abatement of investor anxiety about European politics.

It's been less than two weeks since dozens of Russian tycoons and companies were slapped with the most punitive U.S. sanctions yet, sending the ruble, and Russian stocks and bonds crashing. But in what may be the clearest sign yet that Russian markets are returning to normal, the government will resume its weekly bond sales, offering 20 billion rubles ($325 million) of debt on Wednesday. Russia may have been emboldened to go ahead with the sale after reports that the Trump administration hasn’t decided to impose additional sanctions. Even so, the Russian Finance Ministry opted for shorter-maturity bonds due in December 2021 and notes with a floating coupon due November 2022, according to Bloomberg News' Ksenia Galouchko. “The fact the U.S. administration stopped short of adding to the new batch of sanctions yesterday suggests we might have reached a short-term pause in the ‘sanctions effort’, until further material developments in Syria occur,” Luis Costa, a strategist at Citigroup Global Markets, wrote in a research note. Russia hasn’t given up on placing another eurobond this year, Konstantin Vyshkovsky, the head of the Finance Ministry’s debt department, told Bloomberg News. “We’ll look for a window of opportunity,” Vyshkovsky said. “The situation is now less favorable for tapping the market, but we never planned a placement three days after such a splash of volatility.”

Commodities such as aluminum and soybeans have garnered most of the attention in recent weeks given how central they are to the trade tiff between the U.S. and China. But there's a lot happening in the commodities market that has very little or nothing to do with trade wars. Take cocoa. Prices have taken off, reaching their highest since 2016. Citigroup predicts the tightest supply situation in a decade, and one analyst said that this could just be the start of the rally and that it’s time to be a “raging long-term bull,” according to Bloomberg News' Marvin G. Perez. Prices have surged 43 percent in 2018 as dryness plagues crops in West Africa, which accounts for more than two-thirds of global supplies. This year’s gains are a sharp reversal from the last two years, when futures plunged more than 40 percent amid a global glut. The lower prices took a toll on growers, who cut spending on farm maintenance. That’s now showing up in crop quality as yields begin to drop, Perez reports. Back-to-back deficits would make for the tightest supply situation since 2008, according to data from the International Cocoa Organization. At the same time, demand for chocolate has stayed strong.

The Federal Reserve on Wednesday will release its latest Beige Book economic report, which is based on anecdotal information collected by the 12 regional Fed banks. This will be the first such report since the Fed raised interest rates on March 21 and said a steeper path of hikes in 2019 and 2020 was warranted given an improving economic outlook. In recent weeks, though, the economic data has come in softer than forecast, and the strategists for Bloomberg Intelligence say that market participants will be on the lookout for evidence of inflationary pressures stemming from higher labor cost and fallout from trade-tariff concerns in the business community. On the latter, comments from Fed officials suggest any concerns aren't materially changing the outlook for the economy, according to the BI strategists.

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