The Daily Prophet: Euro's Rally Enters the Realm of Relentless

Connecting the dots in global markets.

Can anything stop the euro? That's a serious question. Europe's shared currency briefly rose through $1.19 on Wednesday for the first time since the start of 2015 and rising from as low as $1.0570 in April when the rally started. The gains have been broad-based, as evidenced by the Bloomberg Euro Index rising 8.74 percent this year, putting it on track to reverse a string of three straight annual declines.

To understand how surprising the rally has been consider that at the start of 2017, none of the 100 or so firms surveyed by Bloomberg expected the currency to be trading above $1.18 at this point in the year. Now, eight expect it to reach $1.20 or higher by year-end. Although much of the euro's strength is a function of the dollar's weakness, there's no denying that the euro zone economy is gathering pace. Eurostat data Tuesday showed the economy expanded 2.1 percent in the second quarter from a year earlier, the fastest pace since 2011. To be sure, a stronger euro could start to bite into the profits of European exporters, and there are signs that analysts are starting to temper their earnings estimates as a result.

“You’ve got a perfect storm to hurt people who are bearish on the euro and bullish on the dollar,” Kit Juckes, a London-based strategist at Societe Generale told Bloomberg Television. “How can Europe have a cheap currency if it has policy normalization and a massive current-account surplus? How can it avoid going back to those levels?” he said, referring to measures, including the Organization for Economic Cooperation and Development's purchasing power parity model, that put the euro at $1.35.

You can't have a conversation about U.S. stocks today without someone lamenting sky-high valuations now that the forward price-to-earnings ratio for the S&P 500 Index has breached the 19 times mark. So what can you do? A study published in the latest edition of The Journal of Portfolio Management says investors can enjoy outsize returns by focusing on “neglected” stocks, according to Bloomberg News' Cormac Mullen. While the prospect of diving into stocks that nobody seems to want can be a bit gut-wrenching, a portfolio that’s long the least crowded U.S. shares and short the most crowded earned an annualized return of just under 19 percent between 1981 and 2012, the study by academics including the University of Windsor's Ligang Zhong showed. That compares with an annualized return of about 10 percent for the Standard & Poor’s 500 Index over the same period. The most crowded stocks tend to be the smaller-cap value shares, while the least crowded are larger-cap growth stocks with lower investment from mutual funds. The least crowded shares are covered by fewer analysts and owned by fewer active fund managers, but they have slightly higher turnover, the study showed.

Much of the discussion in markets the next couple of months is likely to center around the U.S. debt ceiling and whether lawmakers raise it or if there will a big battle between Republicans and Democrats that results in a government shutdown that hurts markets. Traders are already willing to pay up for Treasury bills maturing after Oct. 19 to avoid being caught holding securities vulnerable to a technical default. At least on Wednesday, the talk out of Washington was encouraging. A leading House conservative said Congress will raise the ceiling in September as he backed away from his earlier demands that any increase be paired with steep spending cuts, according to Bloomberg News' Anna Edgerton and Erik Wasson. Republican Representative Mark Meadows, who leads the House Freedom Caucus, said that while he wants changes aimed at cutting the budget deficit, he is ready to accept a bill without other conditions and wants to “get it done sooner rather than later.” “I don’t believe we should play around with the full faith and credit of our country -- I’m bullish on getting it done,” the North Carolina Republican said.

The shale surge that’s tied down global oil prices shows no signs of abating, as four of the biggest U.S. drillers said this week that they’re not backing away from lofty production targets for 2017. In second-quarter earnings reports, EOG Resources, Devon Energy, Newfield Exploration and Diamondback Energy all outlined goals that would help push U.S. output toward a record 10 million barrels a day next year. The reports suggest staying power for a supply glut that’s kept world oil prices on a roller-coaster ride this year, even as OPEC nations vowed to reduce output, according to Bloomberg News' Alex Nussbaum and Joe Carroll. More worrisome perhaps for oil bulls, the U.S. drillers said they’re getting more efficient, allowing them to raise production goals without boosting spending. “In the best parts of the basins, shale is here to stay," said Rob Thummel, managing director at Tortoise Capital Advisors, which manages $16 billion in energy-related assets. “Shale production is going up. It’s not a matter of if; it’s just a matter of how much."

China’s money-market squeeze is back, as the central bank seeks to keep liquidity on a tight leash and concerns grow about a wall of fund maturities this month. The seven-day repo rate rose 14 basis points to 2.94 percent on Tuesday, the biggest increase since May, before easing back to 2.87 percent as of 5:34 p.m. in Shanghai on Wednesday. The yield on 10-year government debt has risen in all but two of the last 13 days to reach an almost two-month high. The People’s Bank of China -- seen to be pushing an official deleveraging drive with renewed vigor following a policy meeting last month -- refrained from boosting the supply of cash in the financial system for the third day in a row, according to Bloomberg News' Helen Sun. The latest developments are unwelcome news for overseas investors, who boosted their holdings of Chinese sovereign bonds in July by the most since September as a link with Hong Kong’s offshore market made purchases easier. Foreign institutions bought 37.8 billion yuan ($5.6 billion) of the debt -- an increase of 8.4 percent from June -- to a record 486.8 billion yuan, China Central Depository & Clearing Co. data released Wednesday showed. Holdings rose for the fifth month in a row.

Keep an eye on the Bank of England on Thursday. There's a good chance that policy makers will look past the weak data of late and signal greater support for higher interest rates when they gather to decide monetary policy. The BOE's Monetary Policy Committee kept rates unchanged when it last met, in June. But the split vote suggested that some members were worried about the risk of a persistent inflation overshoot, according to the economists at Bloomberg Intelligence. Morgan Stanley recommends buying sterling against the Swiss franc as it sees three out of eight rate setters favoring tighter policy, compared with the median economist forecast for a 6-2 vote to hold borrowing costs at current levels, according to Bloomberg News' Stefania Spezzati and Abigail Morris.

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