The Daily Prophet: Stock Greed, Easy Money and Bond Market Zen

Connecting the dots in global markets.

The global stock market has fallen for three consecutive days, its longest slump since January, as the number of items of concern grows. The Federal Reserve looks intent upon raising interest rates next week. The U.S. political scene is only getting more divided. Elections in Europe are proving an existential threat to the region's currency union. North Korea and Iran are test-firing ballistic missiles with impunity.  

Fear not, say analysts, as greed will ultimately win the day. JPMorgan Chase & Co. strategists say investors who pushed equities higher in recent months on bets of faster global growth and inflation should stay the course. Fitch Ratings provided some support for that sentiment today when it said develop-market economic growth should strengthen to 1.9 percent this year and 2 percent in 2018, from 1.6 percent in 2016. Yes, that's hardly impressive, but at least its moving higher.


“Equities are continuing to defy numerous correction calls,” the JPMorgan strategists wrote in a research note Monday. “Activity momentum might be peaking, but we find that this is not enough to take risk off the table. One should remain constructive and look through any weakness.”

Fitch says the acceleration will be led by the U.S., with growth in the euro zone and Japan expected to remain broadly stable. In fact, an index shows financial conditions in America are rapidly accelerating and are now the best since the first half of 2015. Investment-grade debt sales last week totaled almost $60 billion, the second-most this year. Rates for most types of consumer loans have fallen in relation to benchmarks. 
JPMorgan Chief Executive Jamie Dimon said last week that credit in the U.S. has “never been better, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever, ever.” 

Maybe one reason that stocks investors seem so confident is that the bond market appears to be taking the potential for a faster pace of rate hikes from the Fed in stride. Bank of America Merrill Lynch’s MOVE index, which is a measure of anticipated volatility in the market for U.S. Treasuries, has been trending lower. That dovetails with other bond metrics that show the market's confidence in the Fed's ability to keep inflation from accelerating and eroding the value of fixed-income payments.


Or, maybe it's related to confidence in the banking sector. It's widely known that U.S. financial shares have done very well since the presidential election on the prospect for reduced regulations and higher interest rates that could boost profit margins. Less well known is that measures of bank stress levels are tumbling. A gauge of where markets see bank borrowing costs in coming months, known as the FRA/OIS spread, is the lowest since mid-2015. The six largest U.S. banks could see annual profit jump an average of 14 percent if President Donald Trump delivers on his promise to cut corporate taxes, data compiled by Bloomberg show.

The best major currency this year is Australia's. The Aussie dollar has strengthened 4.51 percent against a basket of nine other developed-market peers. The performance of the local economy has recently been beating economists' estimates. Reserve Bank of Australia Governor Philip Lowe said last month that the headwinds for his country from falling commodity prices had turned into a “gentle” tailwind beginning in mid-2016. In a few hours the RBA meets to decide interest rates, and no change from teh current 1.50 percent target is expected.

The White House trade adviser, Peter Navarro, said yesterday that if the U.S. is able to reduce its trade deficit "through tough, smart negotiations, we should be able to increase our growth rate.'' If economists' forecasts for January's trade deficit are any indication, those negotiations can't come soon enough. Imports are seen exceeding exports by $48.5 billion, up from $44.3 billion in December and the biggest gap since early 2012. An improving economy makes it tough to shrink the gap as steady U.S. consumer spending drives imports.

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Emerging-Market Investors Take Liking to Egypt: John Sfakianakis

Global Election Campaigns Are the New Normal: Leonid Bershidsky





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