The Daily Prophet: Who Needs Doves When You Have Goldilocks?

Connecting the dots in global markets.

What a difference a weekend makes. As trading ended Friday, hawkish central bankers had equity -- as well as bond -- markets on tenterhooks with talk of needing to pull back from excessive monetary policy accommodation measures even with inflation showing no signs of accelerating. How bad was it? About $186 billion was wiped off the market value of global stocks last week, the most since April, data compiled by Bloomberg show.

After a bit of contemplation, investors decided that just maybe equities can walk on their own without the crutch of central banks' easy money. As a result, the selloff in U.S. equities abated and the MSCI All Country World Index of stocks rose the most since June 28. The U.S. labor market is at full employment, manufacturing indexes in the U.S. and elsewhere are showing signs of strength without overheating and worries over an impending selloff in technology stocks seem a bit overblown. Earnings season kicks off later this week, and U.S. companies are forecast to show a solid 7.4 percent increase for the second quarter from a year earlier, the fourth quarterly increase in a row after a long period of declines, according to Bloomberg News' Lu Wang.

“Solid employment growth without inflation is the ‘not too hot, not too warm’ mix that keeps the Fed normalizing policy ever so slowly, equity indices marching ever higher and the economic cycle able to trundle on with no recession in sight," Kit Juckes, a strategist at Societe Generale, wrote in a note to clients. After all, stocks have weathered the rise in global bond yields just fine. Yields have risen about two-thirds of a percent on average since bottoming one year ago, and the MSCI All-Country World Index of stocks has still managed to gain about 16 percent.

Even bond investors are feeling pretty good. Treasuries ended Monday little changed after watching yields on 10-year Treasury notes jump to as high as 2.39 percent toward the end of last week from as low as 2.10 percent in the middle of June. The selloff left real yields on 10-year Treasuries, or those after inflation, at their highest since mid-2015. In a note to clients, the fixed-income strategists at Citigroup said they believe "value will ultimately prevail and that the sell-off in government bond markets should begin to run out of steam." Greg Peters, who helps oversee more than $650 billion as senior investment officer at PGIM Fixed Income, said the recent jump in bond yields is a sign that investors should add to their holdings, rather than panic. “It’s way too early to call the death of the bond market here,” Peters said Monday on Bloomberg Radio. “I actually like when investors do that.” Peters said some investors may be overestimating the risk of rising consumer prices and labor costs, adding that he believes that inflation peaked in February. Jim McCaughan, the chief executive officer of Principal Global Investors, said last week’s bond slump was probably a short-term slide tied to uncertainties about the Group of 20 summit and government policy in Washington. “I don’t think it’s any worse than that,” McCaughan said on Bloomberg Television. “I don’t see why you’ll get a really sustained sell-off.”

One would have to go back more than four years to find the last time investors were so down on the dollar. The latest Commodity Futures Trading Commission data released late on Friday showed that hedge funds and other large speculators have amassed the biggest net short position against the greenback since February of 2013. Wagers that America's currency will weaken were outnumbered by bets it will strengthen by 81,582 contracts in the latest weekly reporting period, up from 30,037 contracts the previous week. Sentiment has been steadily eroding since January, when bullish wagers out outnumbered bearish ones by 323,000 contracts. So far, the bears have been right, with the Bloomberg Dollar Spot Index falling more than 6 percent in 2017. Strategists have been busy reworking their forecasts. In a research noted dated July 7, Deutsche Bank's global co-head of FX research, Alan Ruskin, changed his call on the dollar against the euro, and now sees the greenback weakening to $1.17 per euro this year, versus a previous forecast of a gain to $1.02 per euro. Ruskin wrote that the change has more to do with the euro bottoming and moving higher rather "than a broad dollar top story."    

India’s National Stock Exchange, the country’s biggest bourse, suffered its longest halt on Monday after an unidentified glitch disrupted orders and price feeds. That's OK, because the benchmark S&P BSE Sensex set another record high, bringing its gain for the year to 19.1 percent. Indian stocks have been on a tear, easily outperforming those in China, Brazil and Russia -- a group known as the BRICs. Even though the rally has pushed stock valuations to near the highest level in almost a decade, India is what money managers have begun to call a “consensus trade,” meaning almost every fund is bullish on the $2 trillion market, which is benefiting from one of the world’s fastest-growing economies, according to Bloomberg News' Selcuk Gokoluk. Under Prime Minister Narendra Modi, India just rolled out a new goods and services tax that took effect July 1, creating a uniform market across the country for the first time. Modi’s growth policies also include subsidies for affordable housing and an extension of banking to remote villages. The economy will expand 7.3 percent in fiscal year 2018, 7.7 percent in fiscal year 2019 and 7.7 percent in 2020, according to a survey conducted by Bloomberg News.

Among hedge funds, that is. A month ago, money managers were the most optimistic on the metal this year. Now, they can’t seem to unload bullion fast enough, according to Bloomberg News' Joe Deaux. Hedge funds’ net-long positions fell last week by more than half, the biggest reduction since 2015, CFTC data show. Exchange-traded products backed by precious metals experienced cash outflows over the past month, while most other commodity funds took in more investor money. Total assets in SPDR Gold Shares, the world’s top bullion ETF, fell to the lowest since March last week. After reaching an almost seven-month high on June 6, the price of gold has since dropped for five straight weeks, the longest slump this year. Unlike with the dollar, gold bugs are exiting in part because the Fed and other central banks are indicating more rate increases, which can curb the appeal of gold because the metal pays no interest. “I struggle to make a particularly bullish case on gold,” said Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management, which oversees $145 billion in assets. “We think the Fed is on track and continuing to increase rates, and I think that puts a lid on gold.”

Investors are marking time until Federal Reserve Chair Janet Yellen's semi-annual testimony to Congress Wednesday and Thursday will get a bit of an appetizer on Tuesday. That's when Fed Governor Lael Brainard is scheduled to speak on monetary policy at a conference on normalizing central banks' balance sheets in New York. A close ally of Yellen, Brainard could provide useful clues about the timing of the Fed's balance sheet reduction plan, according to the economists at Bloomberg Intelligence. Speaking before the June Federal Open Market Committee meeting, she noted that "the time for a change in balance sheet policy is coming into clearer view." The BI economists will also be watching to see whether she agrees with the FOMC consensus about the "transitory" nature of the recent slowdown in inflation. A moderate dove, Brainard suggested at the end of May that the lack of progress on inflation may lead her "to reassess the expected path of the federal funds rate in the future."

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