The Daily Prophet: European Turmoil, Bond Calm and Stock Bulls
It's getting impossible to ignore the danger signs being sent by markets in Europe. Investors can't seem to dump the bonds of France and Italy fast enough, sending yields to their highest since 2012 relative to German bunds. The region's stocks are underperforming their global peers by an increasing margin. The euro has weakened this year against all but four of the 16 major exchange rates tracked by Bloomberg.
If you were skeptical before, the moves in Europe should leave no question that political risk has supplanted central bank risk as the main driver of markets worldwide. The risks are particularly high in Europe, where the prospective French presidential candidate Marine Le Pen unveiled a manifesto pledge this weekend that includes a pledge to take her country out of the euro currency bloc should she win. Italy is reeling from a near crisis in its banking industry and bracing for its own potential elections. Greece is again fighting with its creditors.
The turmoil in Europe may be one reason that U.S. bond investors are showing remarkable calm despite the continued hawkish comments from Federal Reserve officials about raising interest rates three times this year, with the first coming as soon as next month. The thinking is, a good chunk of the money fleeing Europe will find its way into the ultimate haven: U.S. Treasuries. Yields on U.S. government debt are already higher than those prevailing almost anywhere else in the developed world. Plus, Fed policy makers have shown a willingness to delay rate hikes at the first sign of global turmoil.
President Donald Trump raised some eyebrows when he said Friday that the Dodd-Frank regulations enacted to prevent the next financial crisis were stifling lending. In fact, Fed data show that commercial and industrial loans outstanding stood at $2.1 trillion last week, up from the post-crisis low of $1.18 trillion in 2010. The pre-crisis high was $1.61 trillion. A Fed survey released today showed that banks expect to ease standards on C&I loans this year, while tightening those for commercial real estate borrowers. Demand for corporate debt among investors is so high that January was a record start to the year, leading JPMorgan Chase & Co. to boost its full-year forecast for the amount of new institutional loans industrywide by $150 billion to $550 billion.
VERY PRECIOUS METAL
There's no sign that demand for gold is letting up. Futures surged today to the highest in more than two months as investors grow wary about the possible impact of Trump’s domestic and international policies, as well as the potential for further turbulence in Europe's financial markets. Bullish bets by hedge funds are also at a two-month high. Holdings in SPDR Gold Shares, the largest exchange-traded fund backed by bullion, rose for three straight days through Friday, the longest stretch of gains since October. “The long gold position is the good trade to have on,'' Phil Streible, a senior marke strategist at RJO Futures in Chicago, told Bloomberg News's Susanne Barton. "We should see $1,250 soon.”
It's not all doom and gloom. Optimism is riding high in the stock market even though the S&P 500 has been stuck in one of its tightest trading ranges over the last six weeks. That can be seen in the relatively high prices traders are paying for bullish options on an exchange-traded fund tracking the benchmark, according to Bloomberg News's Cecile Vannucci. The cost of betting on a 10 percent increase in the SPDR S&P 500 ETF Trust in the next month is the highest since July 2014 relative to contracts wagering on the market remaining at current levels. More than half of the members of the S&P 500 have now released earnings this season, with about three-quarters beating profit estimates and about half beating sales estimates, according to data compiled by Bloomberg
It has been a long time since the monthly U.S. trade report got a lot of attention, but that may change quickly given Trump's America First policies and recent critical comments of other nation's currency policies by members of his administration. The Commerce Department is likely to say Tuesday that deficit in trade was little changed at $45 billion in December. The shortfall has been marked by weaker overseas sales of U.S.-made goods and stronger domestic demand for imported merchandise amid the dollar’s strong rally in the second half of 2016.
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