Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web
I've been reading a lot of research this week, and it's clear that economists and strategists from the major global financial firms are a dour, miserable group of people at the moment. Deutsche Bank's Jim Reid is predicting a multi-decade investment environment of disappointing economic growth and low yields ,and Citi's Willem Buiter's outlook is more or less the same.
On Thursday, Merrill Lynch strategists piled on by warning of a more imminent threat of a "fragility event" in global markets,
"They think the markets could be headed for a repeat of the August 2015 stock market swoon, one that was linked in large part to the potential for the US Federal Reserve to pull out the needle of stimulus. Much of the same risk management issues are still in place as concern over interest rate rises in September or December pervade market talk. But this time around there is an added risk of yet another U.S. government debt showdown and an ever present concern over a populist political contagion."
"BAML: Watch For "Fragility Event," Hedge Properly" – Value Walk
"UBS Is the Latest Bank to Warn of a 10% Drop In the S&P 500" – Bloomberg
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For the moment, oil futures are predicting no rally in the commodity price in the next year. The difference between the West Texas intermediate crude December 2016 contract and the December 2017 contract are hitting all time lows. Importantly, this could reflect hedging activity for speculative funds with optimistic bets on energy stocks.
"@JavierBlas2 The #oil glut is getting bigger: popular WTI Dec-Red-Dec spread (CLZ6-CLZ7) is at its widest (closing basis) #OOTT pic.twitter.com/0ZDJ2m9d2W " – (chart) Twitter
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JP Morgan analysts see a lot of similarities between current market volatility and the "taper tantrum" of 2013 when Fed chairman Ben Bernanke warned markets that the central bank's quantitative easing program was about to end,
'"At least a portion of the recent rise in Treasury yields has been driven by shifting perceptions of monetary policy at other developed market central banks," the JPMorgan analysts said. "Coupled with still-long position technicals and rich valuations, the setup is somewhat similar to the preconditions before the taper tantrum in 2013 and the euro tantrum in 2015."
"A JPMorgan survey of its clients showed investors were unusually long sovereign debt in the run-up to the recent sell-off. Portfolios were nearly two standard deviations longer relative to their medium-term average, while the yield on benchmark 10-year U.S. Treasuries traded richer relative to its fair value than they had been at any point in more than four years."
"This Bond Market Sell-off Looks a Lot Like 'Taper Tantrum,' the Sequel" – Bloomberg
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An important Bloomberg report shows that major funds, including pension funds, are compensating for low bond yields by ramping up risk levels, including the use of the same financial instruments that (in my opinion) were the primary cause of the financial crisis,
"Products synonymous with the credit crisis like 'collateralized debt obligations' and 'synthetic securitization' are returning as investors take on more risk while banks are forced by regulators to reduce it. One of Europe's largest pension funds put itself first in line for losses on an 8.4 billion-euro ($9.5 billion) portfolio of corporate loans in exchange for a likely double-digit return, according to two people familiar with the matter."
"Funds Load Up on Risk as Crisis-Era Securities Make a Comeback" – Bloomberg
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Tweet of the Day: "@carlquintanilla Hot Take-Alert: "The Age of Apple is Over: It's Become The New Microsoft" $AAPL hackernoon.com/the-age-of-app… " – Twitter
Diversion: "Ford's Mexico Move" – The Atlantic
Scott Barlow