The Daily Prophet: America No Longer Commands a Premium Multiple

Connecting the dots in global markets.

You can often tell when shareholders are losing confidence in management: A company's share price will likely trade at a discount to others in its sector. It's not much different with a nation's currency and government, except that it's a bit harder to figure out than just comparing price-to-earnings multiples.

One of JPMorgan's top strategists took a stab at trying to determine the relative value of the U.S. greenback, which dropped to an 11-month low as measured by the Bloomberg Dollar Spot Index in the wake of the Trump administration's latest failure on repealing and replacing Obamacare. The conclusion of John Normand, the head of FX, commodities and international rates at the biggest U.S. bank, is that the dollar is about 5 percent too cheap when accounting for interest rate differentials. To understand just how bad things are for the dollar, consider that it has fallen this year against all 16 major currencies tracked by Bloomberg, including Brazil's real, where the government is mired in corruption investigations and President Michel Temer is fighting charges of graft.

Of course, when valuing a currency, there are many variables to consider beyond the political situation, including economic momentum, central bank policies and terms of trade. And Normand does acknowledge that when looking over a longer time frame of a decade or so the dollar looks to be about 10 percent too strong on a real effective exchange-rate basis. But even that premium is starting to shrink. "The takeaway is that the combination of low inflation, low rates and low reform momentum give investors little reason to hold dollars," Normand wrote in a research note to clients.

The latest failings in Washington have caused the narrative to turn in the bond market. Traders are talking less about "tantrums" related to hawkish central bankers and more about the potential for continued sluggish economic growth due to the Trump administration's inability to make headway on any of its pro-growth initiatives. For many, the government's focus on health care distracted it from what really matters to the economy: tax cuts, infrastructure and regulatory reform. Of course, that's all fine with bond traders, who benefit when growth and inflation slow. Yields on 10-year Treasuries fell the most since June 14. "We’ve long tempered our hopes for substantive fiscal reform and we suspect that many in the markets have done the same," the bond strategists at BMO Capital Markets said in a research note to clients. To them, the failure to even get the health care bill to a floor debate in the Senate is ominous because it underscores fissures within the Republican Party that could make it harder to reach an agreement on raising the nation's borrowing authority -- known as the debt ceiling -- and passing a budget.

Stock investors took the health care news in stride, as the S&P 500 Index recovered all of its losses and the Nasdaq Composite Index rose for the eighth straight day. The only loser was the Dow Jones Industrial Average, but that benchmark doesn't get much respect among the pros because it's so narrow. Equity investors are, by nature, optimists and the thinking goes something like this: The failure of health care raises the pressure on Republicans to get something done on taxes or else risk losing seats to Democrats in next year's midterm elections. While it's unlikely that there will be wholesale reform, just some cuts should be enough to support stocks at these lofty valuations. "The equity market has never cared that much about health care," Eddie Perkin, the chief equity investment officer at Eaton Vance, said on Bloomberg Television. The end of the efforts on health care "is good for the prospect of tax reform, which is what the market really cares about," he said. Fun factoid of the day: The S&P 500 Index has now gone 267 days without a 5 percent pullback, the longest such streak since 1996, according to Bloomberg News' Oliver Renick.

Oil and gas prices jumped Tuesday after Petroleum Policy Intelligence said Saudi Arabia is considering deeper export curbs. According to the U.K.-based consultant, the kingdom is mulling whether to reduce exports by as much as 1 million barrels a day to offset the rise in Libyan and Nigerian production. Kuwait, an OPEC member, said last week that the two producers may be asked to cap their oil output amid concern about their rebounding production, according to Bloomberg News' Jessica Summers and Meenal Vamburkar. As is typical of late, traders spent much of their time after the initial surge in oil prices trying to poke holes in the report. “The market is waiting for the proof in the pudding,” Michael Loewen, a strategist at Scotiabank in Toronto, said by phone. “There’s a lot of chatter these days. If Saudi Arabia is actually going to reduce exports” investors will need to see it in tanker-tracking data before they believe it, he said. Oil has held below $50 a barrel since the end of May amid concerns that OPEC and its allies won’t be able shrink the glut of oil, as producers such as the U.S. and Libya ramp up output.

Keep an eye on the yuan, which has quietly strengthened for seven straight days, its longest winning streak since 2015. The gains in the currency, whose moves are tightly controlled by the Chinese government, come amid data showing China's economy grew a faster-than-forecast 6.9 percent in the second quarter. The Asian nation has also started building up its foreign-exchange reserves again, after selling them off the last two years to raise money to support a flagging economy. The gains in the yuan versus the dollar contrasts with its broader weakness as measured by a Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 24 currencies. By that measure, the yuan has weakened for seven straight days. The U.S. government has stepped up its criticism of China's trade practices after Donald Trump said in June that China hadn’t done enough to control North Korea and its nuclear weapons program. U.S. Commerce Secretary Wilbur Ross said Tuesday that China’s maturing economy needs to further open markets to American investors and exporters so they can compete on equal footing. “There remains serious imbalances which we must work to rectify,” Ross said at an event in Washington organized by the U.S.-China Business Council.

It's that time of the month when data on the U.S. housing market comes flooding in. The onslaught of reports started Tuesday, when an index from the National Association of Home Builders/Wells Fargo showed that Sentiment among American home builders deteriorated to an eight-month low in July on concerns about higher material costs. On Wednesday, the Commerce Department will release data for June housing starts, which have fallen for three straight months, the longest losing streak since 2009. Although the median estimate in a Bloomberg survey of economists is for starts to jump 6.2 percent, rebounding from May's 5.5 percent drop, note that the actual results have fallen far below the consensus during the latest slump. Not only are starts sliding, but building permits are, too. When taken together, the economists at Bloomberg Intelligence say the weakening points to a significant slowing in the pace of residential investment, and creates risks to growth in the second half of 2017.

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