The Daily Prophet: Stocks Get a Much-Needed Break From Congress

Connecting the dots in global markets.

U.S. lawmakers are taking time off this week to focus on the Thanksgiving holiday rather than continue their debate on the best way to cut taxes. The cynics will probably say that’s the reason why equities rallied Monday.

In fact, the S&P 500 Index matched its best start to a week since Oct. 16, gaining 0.13 percent, as traders turned their attention back to fundamentals such as the outlook for earnings and the strength of the underlying economy. As for the former, it was revealed that Wall Street has a new biggest bull. BMO Chief Investment Strategist Brian Belski says the S&P 500 will end 2018 at 2,950, 14 percent higher than Friday’s 2,578.85 closing level. The prediction tops the 2,900 target UBS AG’s Keith Parker issued last week and is the highest among Bloomberg-tracked strategists who have provided forecasts for next year, according to Bloomberg News’s Lu Wang. Belski is basing his forecast on higher corporate profits, which he sees reaching $145 a share for the S&P 500. That's up from the median estimate of $130 for 2017.

“Given somewhat stretched valuation levels, it will be tougher for PE to expand meaningfully and earnings growth will be required for the next leg higher,” Belski wrote in a research note dated Nov. 17. “The good news is that current expectations suggest just that -- earnings growth is expected to accelerate into double-digit territory for 2018.” Also, the Conference Board said its Index of Leading Economic Indicators -- cue the jokes about Index of (Mis)leading Economic Indicators here -- surged 1.2 percent in October, its biggest gain since 2013.

One of the hottest styles of investing this year has been momentum, which is basically when investors jump aboard a trend simply because it’s been working. Besides the rally in tech stocks and surge in cryptocurrencies, there are few more powerful trends in markets than a flattening of the yield curve in U.S. Treasuries. The gap between two- and 30-year yields shrunk again on Monday, narrowing to 104 basis points from the high this year of 190 basis points in February. Morgan Stanley’s global head of interest-rate strategy, Matthew Hornbach, figures the trend towards a flatter yield curve is as strong as the force that’s driving gains in bitcoin, which has risen to more than $8,000 from less than $1,000 in January. “Trading the flattener should feel very much like trading bitcoin: you’re meant to buy every dip, if you see the value proposition, even though you’ve already missed what seems like a big move,” Hornbach wrote in a research note. He estimates the yield curve could flatten to 80 basis points by year-end, based on trading patterns. While that certainly presents an opportunity to profit, be aware that a flatter yield curve has historically been associated with a slowing economy, which suggests that either the stock bulls mentioned above are wrong or bond traders who are misguided.

Today’s emerging-market disaster comes courtesy of Chile. The nation had the world’s worst-performing stock market and major currency on Monday amid some unexpected political turmoil. The prospect of a clear victory for billionaire Sebastian Pinera in next month’s run-off election evaporated following a poor performance in the first round on Sunday. Many investors had taken for granted that Pinera would win the second round on Dec. 17, with the benchmark IPSA index rallying 39 percent this year through Friday in dollar terms on hopes the tax cuts he pledged would revive investment, growth and corporate profits, according to Bloomberg News’s Eduardo Thomson. But that’s now in doubt, and the IPSA index retreated as much as 4.8 percent to 5,134.58 in Santiago on Monday, its biggest intraday loss since January 2012, while the peso weakened 1.9 percent to 638.64 per dollar. Pinera, the opposition leader and former president, had 36.6 percent of the vote with 99.9 percent of ballots counted, the electoral service said on its website Monday. “The mood right now is bad, very bad,” Juan Pablo Ebel, a partner at Santiago-based multifamily office Laroche Capital, told Bloomberg News. The strategists at Brown Brothers Harriman advise not getting too negative on Chile. The political differences, they say, are not that great, and copper prices will probably be the major determinant of Chilean assets prices anyway.

After bullish bets on Brent crude hit a record and futures surged to two-year highs above $60 a barrel, hedge funds are pulling back with a sense that the rally reached its limit for now. Wagers on lower prices rose by the most since June as Middle East tensions took a backseat, while uncertainty looms over Saudi Arabia’s push to extend OPEC’s output curbs this month, according to Bloomberg News’s Meenal Vamburkar. Hedge funds cut their net-long position in Brent -- the difference between bets on a price increase and wagers on a drop -- by 1 percent to 537,557 contracts in the week ended Nov. 14, data from ICE Futures Europe show. Shorts surged 8.7 percent, while longs fell 0.1 percent. “We’re at levels where the market appears to have crested,” said Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut. “Continuing to see supply draw-downs is probably what the next leg of the rally will be predicated on.” Meanwhile, the net-bullish position on West Texas Intermediate, the U.S. benchmark, rose 10 percent to 349,712 contracts, according to the Commodity Futures Trading Commission.

A 16-pound turkey will cost about 1.6 percent less than last year, and the whole meal will be the cheapest since 2013, according to an annual survey from the American Farm Bureau Federation. The drop in turkey prices reflects ample supplies after a recent production boom as well as stagnant U.S. demand, according to Bloomberg News’s Megan Durisin. While the worst-ever U.S. bird-flu outbreak killed millions of birds in 2015, the epidemic has since abated and U.S. production has climbed faster than demand in the past two years. “After avian influenza, the market actually overcorrected quite frankly and supply became excessive,” Jay Jandrain, chief operating officer of Butterball LLC, the North Carolina-based producer that sells about a third of all Thanksgiving and Christmas turkeys, told Bloomberg News. One of the industry’s challenges has been surging production growth for beef, pork and chicken, said Tom Elam, president of Indiana-based FarmEcon. That’s created “more of a general supply of protein on the U.S. market to compete with everybody,” Elam told Bloomberg News. Exports have helped to offset some of the expanding meat supply.

A U.S. government report Friday showed that housing starts had a blowout month in October, rising 13.7 percent and handily beating the 5.6 percent median estimate of economists. So, does that mean existing home sales due out Tuesday will follow suit? Probably not. The housing starts data was goosed, in part, by recovery efforts in the hurricane-stricken South. Existing home sales are only seen advancing 0.2 percent, after jumping 0.7 percent in September. While housing demand remains strong, supply is extremely lean, which limits the extent of a more robust improvement in property sales, according to the economists at Bloomberg Intelligence.

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The Unintended Consequences of a Flatter Yield Curve: Tim Duy

Bitcoin Has an Unusual Relationship With Volatility: Aaron Brown

Large-Cap Stocks Are Reasonably Priced. No Joke: Nicholas Colas

Forward Guidance Hasn't Reduced Volatility: Komal Sri-Kumar

How to Build on Europe’s Economic Recovery: Mohamed A. El-Erian

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