The Daily Prophet: No Wonder This Bull Market Is Unstoppable

Connecting the dots in global markets.

There's a saying on Wall Street that markets tend to do the things that cause the most amount of pain for the greatest number of investors. That may be a bit of a cliché, but it's playing out in real time right now in the U.S. stock market.

Money managers are a net 20 percent underweight U.S. stocks, meaning they are more bearish than any time since January 2008, according to a Bank of America Merrill Lynch survey of 207 investors with a total of $586 billion under management. That's despite the major averages setting new records on an almost weekly basis. There are a few takeaways here, all supportive of equities. One is that the survey suggests there is lots of money that could be put to work in stocks. Another is that there aren't a lot of natural sellers left, since anybody who wanted to sell has already done so. And finally, the most successful investors say that the time to buy is when everyone else is selling.

Source: BofA Merrill Lynch Global Fund Manager Survey

So, what are investors most worried about, other than suffering through more questions why they can't beat their benchmarks and passive funds? According to the Bank of America survey, the three biggest risks are a crash in global bond markets, the Federal Reserve or European Central Bank making a policy mistake, and Chinese credit tightening, according to Bloomberg News' Julie Verhage. Perhaps most surprising, risks that moved lower on the spectrum included delays to U.S. tax reform and a trade war.

The Bloomberg Euro Index fell from its highs of the year before the ECB's policy decision Thursday. The chief concern among Governing Council members is that investors might jump on any signal that bond purchases are about to be tapered, pushing up market interest rates and undermining the euro-area recovery, according to Bloomberg News' Piotr Skolimowski and Alessandro Speciale. The shared currency tumbled on June 8, the last time ECB policy makers met, as President Mario Draghi expressed concern that inflation wasn't accelerating as much as the central bank had hoped. For traders, that meant the ECB wasn't ready to pull back from policies that tend to debase a currency, namely the printing of money to buy 60 billion euros ($69 billion) of bonds a month. Will Draghi repeat that message? The action in the currency market suggest traders don't want to take that chance. “It seems that, shortly ahead of the ECB meeting, traders are getting cold feet,” Esther Reichel, a foreign-exchange strategist at Commerzbank, wrote in a research note.

There's certainly a lot of confidence in the U.S. bond market that the Fed will avoid making a policy mistake, judging by the relative level of yields and low volatility. The same can't be said of the government. When it comes to the debt ceiling, money-market investors aren’t waiting for Treasury Secretary Steven Mnuchin to inform Congress of the exact date the U.S. will run out of cash. Traders are already willing to pay more for bills maturing after Oct. 19 to avoid being caught holding securities vulnerable to a technical default -- in line with Congressional Budget Office forecasts that predict the federal government will hit the debt ceiling around early- to mid-October, according to Bloomberg News' Alexandra Harris. Because of the anxiety surrounding the debt limit, bills maturing Oct. 19 are yielding 1.08 percent, versus 1.07 percent for securities due Oct. 26. According to the strategists at Bloomberg Intelligence, reaching an agreement on a debt ceiling deal may be more difficult now than during the 2011 and 2013 debt-ceiling crises. That's because the current Senate has the widest partisanship range -- the average conservative score less the average liberal score -- since the late 1800s, the strategists wrote in a research note.

Oil and related energy prices are on the rise after government data showed stockpiles continue to fall, allaying anxiety about a supply glut, according to Bloomberg News' Meenal Vamburkar. Crude closed above $47 a barrel for only the second time since early June as U.S. inventories fell by 4.73 million barrels last week as measured by data from the Energy Information Administration. Gasoline supplies shrank 4.44 million barrels, the most since March. That spurred a 2.3 percent boost in gasoline futures to $1.6155 a gallon, the highest intraday level in more than six weeks. “It’s definitely a bullish report here today,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. “Across-the-board drawdowns can’t be ignored.” Saudi Arabian shipments of crude to the U.S. slid to a seven-year low last week, a trend likely to extend through the summer amid OPEC output cuts and the kingdom’s seasonal ramp-up in domestic consumption, accordingh to Bloomberg News' Sheela Tobben. 

Not only is the peso the best performing major currency in the world this year, rising about 18 percent against the dollar, but late Tuesday S&P Global Ratings raised its outlook for Mexico to "stable" from "negative." The ratings company said it expects the country's debt to hold below 50 percent of gross domestic product for the next two years, and that its base case scenario on the North American Free Trade Agreement is that the U.S., Canada and Mexico agree on a new trade deal that largely preserves the cross-border links that underpin the North American economy. The receding risk of a Nafta overhaul that hurts Mexico’s economy and debt reduction efforts have put markets at ease, as evidenced by the spread compression in its five-year credit default swaps. That shows the risk of owning Mexico's bonds has fallen more than for any other country in Latin America this year, according to Bloomberg News' Isabella Cota and Maria Jose Valero.

The ECB isn't the only central bank about to make news. The Bank of Japan will wrap a two-day meeting in a few hours and the consensus is for its policy framework to remain unchanged. As is so often the case with central bank meetings, that's only half the story. Investors will focus on the BOJ’s updated growth and inflation forecasts. Policy makers face questions about the sustainability of their easing program as other major central banks turn toward tightening, according to Bloomberg News' Toru Fujioka. It has become routine for the BOJ to lower its inflation forecasts, having done so during every update since October 2014. Economists are expecting more of the same this time even though Governor Haruhiko Kuroda appears to be starting a tricky process of communicating how the BOJ may eventually manage an exit from quantitative easing measures, according to the economist at Bloomberg Intelligence. The BOJ is buying 80 trillion yen ($720 billion) of bonds annually, and 6 trillion yen of exchange-traded funds. The BOJ owned about 71 percent of all shares in Japan-listed ETFs at the end of June.

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