The Daily Prophet: Buy the Dip Proves Effective Yet Again

Connecting the dots in global markets.

Throw out all the fancy models. All you really need to know to be a successful investor these days is that when stocks fall, start buying in bulk. Just look at the S&P 500 Index, which rose today, erasing all of its losses related to President Donald Trump’s failed effort to repeal and replace Obamacare.

Although the pessimists would say the recovery in equities is just more proof that investors are too complacent, there’s a growing sense that no matter what happens in Washington, the fundamentals are looking up. After all, borrowing costs are still depressed, the dollar has softened up in recent months, corporate earnings are rising again, and just today reports showed that consumer confidence is the highest since 2000 and home prices are rising at the fastest pace since mid-2014. That’s key, because consumer spending accounts for about two-thirds of the economy.

“Equity market participants have taken a look at the lower yields and weaker dollar and decided that since absurdly low rates are the elixir that the equity bull market lives on, they might as well ‘buy the dip’ yet again,” Kit Juckes, a London-based global strategist at Societe Generale SA, wrote in a research note. That’s not say there aren’t plenty of red flags. Evidence suggests the recent demand is tied to small investors, as hedge funds, corporate insiders and even companies back away from the market by reducing share buybacks.

The greenback got a bit of a reprieve today after falling to levels that suggested the selling had gotten a bit out of hand. The Bloomberg Dollar Spot Index rose 0.44 percent in its biggest gain since March 2. The gauge is still down about 4.7 percent from its intraday high of the year set on Jan. 3, and a measure of its relative strength fell to a reading of 30 yesterday, a level that suggests to those who watch trading patterns that the decline had become overdone. No doubt the currency also got support from Fed officials today reiterating their views that more interest-rate increases are likely before year-end, which could attract yield-starved global investors to dollar-denominated assets.

The comments from Fed officials, including Vice Chair Stanley Fischer, provided little incentive for bond traders to keep pushing yields lower. The yield on the benchmark 10-year Treasury rose to 2.41 percent today, after falling as low as 2.35 percent on Tuesday. The yield has traded in a broad range of about 2.30 percent to about 2.63 percent since the end of November. Partly due to the reduced outlook for inflation following the recent drop in oil prices, the perceived risk of holding long-term Treasuries has diminished. The 10-year term premium, a measure of the extra compensation investors demand to own that maturity instead of rolling over a series of shorter-dated obligations, is the least since Nov. 9, according to Bloomberg News’s Liz McCormick, citing a Federal Reserve Bank of New York model.

There’s also little reason for bond traders to push yields lower if oil isn’t falling, and that wasn’t the case today. Crude rallied on reports that Libya has curbed shipments from its biggest field, tempering concerns about the global supply glut, according to Bloomberg News’s Mark Shenk. West Texas Intermediate for May delivery advanced 79 cents, or 1.7 percent, to $48.52 a barrel at 1:07 p.m. on the New York Mercantile Exchange, after the North African country declared force majeure in the loading of Sharara crude from Zawiya terminal. (Force majeure is a legal clause that allows companies to halt shipments without breaching contracts.) Five OPEC countries joined non-member Oman over the weekend to voice support for prolonging their deal to cut output past June. However, rising output in the U.S. has blunted the effect of production curbs by OPEC and its allies. 

Agriculture traders seem resigned to the idea that low prices are here to stay. Years of bumper grain harvests, along with low prices and diminished volatility, have made it harder for the top firms to make money buying and selling major crops like wheat, corn and soybeans. Bloomberg News’s Agnieszka de Sousa and Andy Hoffman report that executives at the FT Commodities Global Summit in Lausanne, Switzerland, believe that gluts, which have pushed crop prices to near the lowest since 2009, will probably last for a while yet. During the boom years, the industry thrived on price swings and expanded in a bet that bigger populations would drive food demand and profits. But massive harvests have helped push the Bloomberg Agriculture Subindex down almost 50 percent since 2012. That’s forced a shake-up at many companies.

Global investors may be paying closer attention to the U.K. on Wednesday than usual. That’s when a letter personally signed by U.K. Prime Minister Theresa May and officially serving as the invocation of Article 50 of the European Union’s Lisbon Treaty marking Britain’s departure from the bloc arrives in Brussels. That will happen at around 1:30 p.m. in Belgium, just as May is about to stand up and address the House of Commons, according to Bloomberg News’s Alex Morales. Sterling has been rather resilient in recent months, with the Bloomberg British Pound Index actually appreciating over the past five months. This month, the Paris-based Organization for Economic Cooperation and Development boosted its 2017 growth projection for the U.K. to 1.6 percent from 1.2 percent, citing the success of Bank of England stimulus and an easing of fiscal austerity in the wake of the Brexit vote.

Second-Order Effects Are Real Risks to Trump Trade: Ben Emons

Retailers’ Dividend Yields Should Be Viewed Warily: Ben Carlson

Euro-Zone Growth Pessimists Are Wrong (Again): Mark Gilbert

Shadow Banking Is Getting Bigger, Not Better: Leonid Bershidsky

How Utah Has Kept the American Dream Alive: Megan McArdle

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