The Daily Prophet: Small Caps Don't Worry You? Check Your Pulse

Connecting the dots in global markets.

All good things come to an end. Just ask investors in small cap stocks. The Russell 2000 Index soared 21.4 percent between Donald Trump’s election victory on Nov. 8 and July 25, handily beating the Dow Jones Industrial Index and the S&P 500 Index. Clearly, the performance showed that investors expected smaller companies to benefit disproportionately from Trump’s “America First” policies and plans to cut taxes, ease regulations and boost infrastructure spending.

Since late July, however, the tide has turned, with the Russell 2000 underperforming and now flat on the year as turmoil in the Trump administration has led investors to question whether any of his pro-growth polices will come to fruition. This isn’t just usual market gyrations or the mindless “profit taking” that so many pundits like to call declines. What makes this downturn concerning is that that so-called smart money can’t get out fast enough. Large speculators turned more bearish on smaller companies in eight of the last nine weeks, with net short positions in Russell 2000 index mini futures reaching levels not seen since November 2009, according to Bloomberg News’s Lu Wang. 

At the same time, data from the Commodity Futures Trading Commission show that bullish holdings of S&P 500 futures rose to the highest since April. Before you start interpreting that as a bullish U.S. signal, consider that it’s probably more a reflection of investors shifting their bets to multinational firms that are poised to benefit from economic acceleration from overseas, according to Wang.

The dollar picked up where it left off last week -- just as it has so many times this year -- which is to say it weakened. Long-suffering dollar bulls hailed the strong July jobs report released on Aug. 4 as a turning point for America’s currency. If you recall, the economy created 209,000 jobs that month, beating the median estimate by 29,000, and the unemployment rate dropped to 4.3 percent. Yes, the Bloomberg Dollar Spot Index did get a boost, but then came fresh turmoil in Washington and the greenback is now back where it was on that first Friday of the month. Things are so bleak that strategists say about the only thing the dollar has going for it is that there’s nobody left to get bearish. That’s at least the opinion of Sameer Samana, global quantitative and technical strategist at the Wells Fargo Investment Institute. He expects Intercontinental Exchange Inc.’s Dollar Index will gain four percent to six percent by year-end if the Federal Reserve starts reducing its balance sheet in September and raises interest rates one more time this year, according to Bloomberg News’s Anna Windemuth. “The positioning is so skewed” against the greenback, said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management, which manages about $83 billion. “It’s the No. 1 factor behind my short-term positive view on the dollar.”


There’s one clear beneficiary from the weaker dollar. Industrial metals extended their longest weekly rally in three years, with nickel pacing gains and zinc touching the highest in almost a decade amid a combination of faster global economic growth, a weaker dollar and shrinking supplies. An index of the six main metals traded in London climbed for a sixth straight week on Friday, the longest such rally since April 2014, according to Bloomberg News’s Yuliya Fedorinova. Nickel jumped as much as 3.4 percent in London as Japan’s top refiner said it expects a larger global shortage. Most of the main contracts on the London Metal Exchange rose, with copper touching the highest since 2014. Investors are turning more bullish on the outlook for top metals user China, said Wei Lai, an analyst with Cofco Futures. The rally has helped push a Bloomberg Intelligence gauge of 18 of world’s biggest mining companies up 28 percent the past two months. “Mining equities and industrial metal prices will remain resilient in the next three to six months due to the lagged positive effect of Chinese infrastructure projects,” Fitch Group’s BMI Research said in a report Monday.

When the carmaker sold $1.8 billion of bonds on Aug. 11 carrying a coupon of 5.3 percent, which was a record low for a bond of its rating and maturity despite Tesla’s lack of profit and record cash burn, traders said the securities were priced for perfection. Well, it turns out Tesla isn’t so perfect. The bonds have slipped to as low as 97.4 cents on the dollar since the offering, according to Bloomberg News’s Sally Bakewell and Nabila Ahmed. The pace of the price decline is notable for a new issue in the bond market, where securities are less prone to the volatility seen in stocks caused by changing economic and political data, Bakewell and Ahmed reported. Excess demand typically would prop up trading in the secondary market. Bonds sold in four of the five biggest deals in the high-yield market this year rose more than 2 percent in the week after pricing, with the fifth trading flat. It’s also notable that the offering came a time of heightened concern about riskier assets. Perhaps at some point in the future historians will look back and conclude that the Tesla offering marked the top of the market.

Central bankers are scratching their heads trying to figure out why inflation isn’t accelerating even though the U.S. economy is at full employment, as their models suggest should happen. If that wasn’t perplexing enough, the Federal Reserve Bank of New York is out with a new survey that should further complicate matters. What it found was that job-seekers in the U.S. have in recent months reduced the amount of money they would need to be offered to accept a new position, according to Bloomberg News’s Matthew Boesler. The average so-called reservation wage of survey respondents declined to $58,000 last month, marking the lowest amount since March 2015. Reservation wages -- the lowest wage respondents would be willing to accept for a new job -- play a key role in determining labor supply in modern models of the job market, but empirical data have been scant, according to Boesler. The New York Fed began collecting data via its monthly survey of U.S. consumers in early 2014, and shared the data for the first time on Monday. The decline in reservation wages was broad-based across demographic groups, showing up in responses from men and women, younger and older respondents, and those with and without college degrees alike.


Every once in a while, the monthly ZEW survey of German financial professionals moves markets. Tuesday has the potential to be one of those days, given the dearth of top-tier economic data on the global calendar. Many economists generally don’t give a lot of credence to the survey, since it doesn’t cover businesses, but at the least investors will be looking for the survey to confirm other evidence showing stronger momentum in the euro-zone economy. Data last week showed the euro-zone economic recovery is starting to spread across the 19-nation region. Exports and investment have led France to its strongest continuous expansion since 2011 and the Netherlands posted the fastest growth since the end of 2007, according to Bloomberg News’s Maria Tadeo. Italy is starting to shake off its reputation as the sick man of Europe with an increase in gross domestic product that may top 1 percent this year for the first time since 2010.

Markets Are Losing Their Patience for Trump’s Antics: David Ader
Stock Market Returns, Like Politics, Aren’t Normal: Dean Curnutt
China Bank Bears Must Brace for Disappointment: David Millhouse
Fed Has Good Reason to Expect Wage Growth Will Pick Up: Tim Duy
The Fed’s Timidity Helps No One at This Point: Komal Sri-Kumar

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