Prophets

The Daily Prophet: Stock Market Bears Are Hiding in Plain Sight

Connecting the dots in global markets.

Looking at the stock market these days it would be easy to come away with the opinion that it's nothing short of full-blown exuberance. Investors are finding it easy to rationalize sky-high valuations if they introduce President Donald Trump's corporate tax cut proposals into the equation. According to brokerage firm Convergex, an astounding 84 percent of the 2,009 U.S. listed exchange-traded funds are either up or at least flat on the year. 

Digging beneath the surface, though, reveals a healthy dose of skepticism. In fact, for the past two months the discrepancy between bearish bets on individual stocks versus the SPDR S&P 500 ETF has grown to the widest since at least 2008, according to exchange-reported figures. Shorting the S&P 500 as a whole through the ETF is hardly ideal because you can’t pick sectors, so you end up betting against tech giants like Apple, Facebook Inc. and Amazon.com, according to Bloomberg News's Dani Burger.

Investors hoping for details of the Trump tax plan were left disappointed. All they got was a broad outline of principles, causing stocks to give up their gains. “The plan that has been announced today is very aggressive, and unlikely to pass as is,” said Alan Gayle, a senior strategist who helps oversee $42 billion at RidgeWorth Investments. “I haven’t heard of anyone on the street that has been adjusting earnings estimates based on the likelihood we’ll get tax reform. This remains an unknown and it’s not being factored into the market yet.”

IS THIS ANY WAY TO TREAT YOUR NEIGHBORS?
Mexico’s peso, the Canadian dollar and shares of companies that rely on cross-border trade plunged amid reports that the Trump administration is close to scrapping Nafta, according to Bloomberg News's Isabella Cota, Ben Bartenstein and Michelle F. Davis. The administration has prepared a draft of an executive order to withdraw from the trade accord, Politico reported Wednesday, citing White House officials it didn’t identify. The move is still under internal debate, according to the article. It was published just days after Trump levied a tariff on imports of softwood lumber from Canada, decrying unfair competition. A week ago, the U.S. president called Nafta a “disaster.” "People are getting more nervous after the U.S. imposed a tariff to Canada," said Andres Jaime, a foreign-exchange strategist at Barclays.

IT AIN'T OVER UNTIL IT'S OVER
Bond investors are far from convinced that the risks surrounding the French election are over despite the broader market ebullience following the outcome of the first round, according to Bloomberg News's John Ainger. Open interest, a measure of the number of contracts outstanding, has dropped 10 percent this week even as French government bond futures surged after the race for presidency narrowed to centrist candidate Emmanuel Macron and euroskeptic Marine Le Pen. A decline in open interest amid a rally in an asset typically suggests short-covering rather than new positions being added. Le Pen’s narrow chances of victory hinge on swathes of the electorate not showing up at the polls on May 7, according to analysts sifting through the numbers after she won 21 percent of the vote in the first round on April 23, trailing Macron by about 3 percentage points.

THE NEW, UNLIKELY HAVENS
Remember the narrative about how Trump's policies, when combined with higher Federal Reserve interest rates, were going to kill emerging markets? Well, that's not exactly happening. In fact, equities and currencies in the developing world are heading for the best annual start in at least a decade and their dollar- and euro-denominated bonds are flirting with a record, according to Bloomberg News's Srinivasan Sivabalan and Natasha Doff. The appetite for higher-yielding assets has increased rather than diminished with the end of ultra-low borrowing costs and the rise of populism, and there are some very good reasons why. While some developing economy nations are facing their own political upheaval, investors bet the changes will be net positives in the long term. Also, the valuation discount on emerging-market stocks relative to developed markets is actually about 10 percentage points wider than its 10-year average.

TRADERS SOUR ON SUGAR
The commodities market was fixated today on raw sugar prices, as contracts for July delivery plunged 4.4 percent, bringing its year-to-date decline to 21.2 percent. Sugar is getting pummeled by a global surplus and diminished expectations for imports by India, among other things, according to Bloomberg News's Marvin G. Perez. Also, Brazil is a major producer of sugar, and a weaker Brazilian real likely means greater sales from that country, while higher European Union supplies add to the bearish price sentiment, according to Bruno Lima, head of sugar and ethanol at INTL FCStone in Campinas, Brazil. The probably fallout from an El Nino weather threat in Asia later in 2017 and recent dryness in Brazil will support prices, according to Rabobank strategists.

TEA LEAVES
Thursday is a big day for central-bank watchers as both the Bank of Japan and European Central Bank meet to decide monetary policy. All but one of 39 economists in a Bloomberg News survey predicted the BOJ will leave its stimulus measures unchanged at the two-day gathering, though it may lower its inflation forecast for the fiscal year that started this month, people familiar with discussions at the central bank told Bloomberg. No major changes are expected at the ECB meeting, either, but traders have renewed their bias about a faster pace of tapering of the central bank's bond purchase program this year, according to the strategists at FTN Financial. To be sure, if the euro strengthens too much, it works against the ECB's current goals and perhaps keeps policy looser than it would be otherwise, they said.

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Bond Market Reaches a Crossroad. Here's What to Do: Mark Grant

How Markets Have Responded to Tax-Code Changes: Ben Carlson

U.S. Can Afford President Trump's Radical Tax Cut: Tyler Cowen

Trump the Bully Even Picks On America's Friends: Joe Nocera

Social Unrest Is France's Biggest Risk: Jean-Michel Paul

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Robert Burgess at bburgess@bloomberg.net

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